Hunter Thompson is a return two time guest from episode JF1545, and JF1220. In this episode, you will learn a ton from Hunter on attracting the right investors, how to establish credibility and fund your future deals. This exact same information has helped him raise more than 30Mil in private capital. He has a book called “Raising Capital for Real Estate” so be sure to check his book out to ensure you can get more info on this topic.

“Content creation is one of the most efficient ways to build your brand but also raise capital.” – Hunter Thompson

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today we’ve got a two-time repeat guest, back for a third time, Hunter Thompson. Hunter, how are you doing today?

Hunter Thompson: Hey, Theo. Thanks again for having me on.

Theo Hicks: Absolutely. I’m looking forward to our conversation. Today is Sunday, which means it’s Skillset Sunday, where we go over a specific skill that our guest has. Today we’re gonna be talking about how to attract investors, establish credibility, and fund deals.

A little bit about Hunter before we begin – he’s the founder of Asym Capital, which is a private equity firm. He has raised more than 30 million dollars in private capital. As I mentioned in the intro, he’s been on the show two times before; listen to his episode 1545, “Seven due diligence items for passive investors and passive investing opportunities”, as well as 1220, “He took his money out of the stock market to syndicate self-storage and mobile parks.” Both of those links will be in the show notes as well.

He just had a book come out. We’re recording this in the past, but when this episode airs, the book will be live. That book is “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility and Fund Deals”. You can buy that book by click on the link in the show notes.

He is based out of L.A, and you can say hi to him at asymcapital.com. Hunter, before we get into the main skill of today, do you mind giving us a little bit more about your background and what have you been focused on since the last time we spoke?

Hunter Thompson: Yeah. So it’s interesting, there’s so many ways to make money in real estate. I mentioned earlier about conducting due diligence, which is obviously critical; if your deals don’t perform, no one’s gonna get paid… We talked about mobile home park businesses, self storage business… But in my opinion, this element of real estate is the most important, sought after and lucrative part of the entire business. I was at a conference recently where someone said “Is the money in the deal, or is the money in the money?”, and man – the money is really in the money.

Now, that could be the case that not everyone agrees with that and not everyone wants it to be that way, but it certainly is, at least for right now. In those earlier interviews I had been focusing on very much of the same; we have been focusing on the recession-resistant real estate asset classes, most notably mobile home parks, self-storage, and workforce housing, or C and B class apartments. I’m really comfortable with those, from my perspective. I know that a lot of people are more and more interested now in the “recession-resistant” real estate asset classes.

From my perspective, it’s always a good time to invest in recession-resistant real estate, not just late in the cycle. Because when the economy is booming and the capital markets are loose, you’re going to get the advantages there. But when the economy is correcting or there’s a recession, you still get the advantages of the stable demand for that product. So more of the same – I experienced a lot of success and a lot of growth and a lot of scalability, and that’s what we’re really gonna talk about today.

Theo Hicks: And you wrote a book, which is a great accomplishment. I’ve written three, working on the fourth right now, so I totally understand the work and effort that gets put into that, so… It’s always great to talk to the fellow authors who’ve gone through that experience.

Hunter Thompson: I appreciate that. I’m going through the experience that most people go through when they write a book, which is — you know, I have waited a long time to build up the knowledge to feel comfortable sharing with people, because I want to make sure that I was bringing a lot of value to the table. So I wrote the 60,000 words in about 60 days… And I was like “Wow. When is the next one gonna be?” And then I started the editing process and realized “I’m never gonna write another book in my entire life.” That’s where I’m at right now.

But no, I’m really proud of it, and also I have been really fortunate in the sense that I’ve been able to give back to the community… But I’m really happy and looking forward to the response to this, because there’s so many key takeaways. I’ve spent $100,000 on legal fees in 2018. A lot of what I’ve learned in pursuit of that is in the book, and of course, the strategies and systems that I’ve outlined are what has enabled us to get to where we are today… So I’m really happy to hear both of those responses.

Theo Hicks: So the title of the book is, again, “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility and Fund Deals”. You did kind of drop a bomb that you paid 100k in legal fees and you learned some lessons, so do you wanna walk us through what happened, and the lessons that you learned?

Hunter Thompson: Oh, jeez. If you wanna start with the securities law stuff, that’s gonna probably bore your listeners to death. It’s one of those things where — when you’re dealing in the world of securities, you’re entering a new dynamic, where not only pooling investors together has significant legal implications. You have to stay within the SEC’s guidelines. But as an investor, it’s very favorable, because not only do you get the economies of scale going along with pooling investors together… In the sense of if you lose $25,000 in a syndication, it’s very hard to pursue someone and spend less than $25,000 on legal fees. But if you cumulatively invest in a syndication, there’s much more ability to pursue someone if they act in bad faith… Because cumulatively, each person may invest $25,000 and you may cumulatively be able to come up with a quarter million dollars, which is gonna actually do it.

But from a big-picture perspective, I’ll give away something that took me a lot of money to realize – and maybe not everyone listening to this agrees with this, but I’m a huge proponent of the 506(c) offerings. Those are the offerings which allow you to publicly solicit. It doesn’t necessarily mean that you “don’t wanna know your investors” or that you’re actually interested in publicly soliciting investors… But the solicitation or the 506(c) offering requires that you have a third-party verification of your investor status as an accredited investor. I think that level of scrutiny really adds to the protection of the [unintelligible [00:06:48].05] the person who’s actually creating the deal.

I don’t have to worry about going on a podcast or going on a webinar and conducting an in-person dinner – all of which I talk about in the book – I don’t have to worry about saying the wrong thing at those events, which can cost me later down the road. If you’re using 506(b) – and please don’t take this wrong, this is just my perspective – there’s so much grey area surrounding it that I just don’t feel comfortable with it. Once you do create your 506(c), I think you’ll never create another 506(b). Just my opinion, of course.

Theo Hicks: I actually just did an interview earlier today – I’m not sure if it will air before or after those one – with Ryan Gibson; he does 506(b), and he basically mentioned the exact same thing. He has a really good process for making sure that he is going by the book. So make sure that if you are doing 506(b) you check out that episode and learn his process for making sure that he has that pre-existing relationship with them. Alright, thanks for sharing that.

Let’s go into the book… Attract Investors, Establish Credibility and Fund Deals. In the context of — let’s say I have not done a syndication deal before, but I do have previous real estate experience. So I’m not a complete newbie; maybe I’ve done — let’s just use me as an example – I’ve done 15 units worth of multifamily before, and I want to scale up and raise capital for a 50-unit building, and I want to attract investors. What should I do?

Hunter Thompson: I’ll tell you what I did, and you can use it as a playbook of what not to do, when I started thinking about scalability. Back in 2011 I saw a great opportunity in the mobile home park business. I spent about two years learning every single thing I could as an investor, flying around the country, doing due diligence, taking it very seriously, as a full-time job. By 2013 I figured I had established a track record, I had created some amazing relationships with some high-caliber operating partners, and wanted to create my first fund.

Basically, what I did is I had an investor luncheon where I invited extended friends and family and their plus-ones or plus-two’s (they had to be accredited investors), I went through a 30-minute presentation, and at the end of the presentation I handed out a piece of paper so that people could write how much money they are interested in investing. I agreed with my partner that we’d at least raise half a million dollars; I thought I could raise up to a million dollars. There was 30 million dollars of net worth in this room.

I went through the presentation, I was very comfortable speaking in front of people, I answered some questions, and resulted in me raising a total of zero dollars. This was heartbreaking. And really what the book is about is realizing what I did so wrong, and then creating the infrastructure to do the opposite of that.

What I did wrong was that I envisioned myself going out and finding investors, converting them to investors in real estate – which is basically like a pseudo-religious experience, to say “Okay, I’ve invested my whole life in the stock market…” Now in this 30-minute luncheon this person is gonna start investing in not only just real estate, but the mobile home park business.

So I’m thinking about it in the wrong way. I needed to create an infrastructure that attracted the right people, that were already interested, converted them through education and indoctrination to a certain extent, and then close them through this sales process. So there has never been a more favorable time to create that infrastructure now. So if you haven’t really started doing this content creation — it is so asymmetric; it’s one of the most efficient ways to build your brand, but also raise capital… Because if you go through the process of writing ten articles, which we can talk about in a second how to do that, just writing the articles alone will help you communicate more effectively to future investors, so much so that it’ll pay for your time. That’s if no one even ever reads the article. So the book is really about how to create that infrastructure and then funnel people through the sales closing process.

Theo Hicks: Alright, so let’s talk about the infrastructure for a second. Content creation – basically, what you’re saying is that you want to have some sort of thought leadership platform where you pump out content, and then use that to educate people and attract people who are already interested in investing. Then once you have those people who are already interested, that’s when you close them.

Hunter Thompson: Exactly. And that’s how you create a system that’s actually scalable. Because a lot of these sales strategies may take you from closing 40% of your investors to 60%. That’ll be a remarkable increase. But if you only have ten people in the room, that’s going from four people to six people. I don’t wanna go from four to six. I wanna go from 4 to 4,000, and the only way to do that is to attract the right people.

One of the things I talk about in the book which is a reoccurring theme is time batching. I’m hyper-obsessed with productivity, so I like to do things only in increments of 60 minutes to 180 minutes. And I don’t like to shift gears cognitively when I do these tasks. So what I’ll do is I’ll block out the 60 to 180 minutes, and all I will write is up to 100 topic article titles. These are things like “Five reasons to invest in self-storage; is the mobile home park business actually recession-resistant; what does low interest rates mean for housing?” Those are three, so if you wanna use those three, go ahead; you’re only gonna have to come up with 97 more.

And then I go and sort those articles up, put them in Excel, put them in numeric value in terms of how quality I think they are and how aligned with my business they are, sort in terms of numeric value and then write an article about the first ten. And that is the beginning of your lead nurture process. I’m telling you, just going through that process alone is gonna help you. And then if you still have some below that ten that are still compelling, I would write outgoing emails – these are probably 300 to 500 words – I would write those emails about those remaining topics. And you’ll probably work your way down to where it doesn’t make sense to write about topics about things that are low on the numeric value. Stop that, put those emails in an outbound drip campaign so that your new investors receive one every single week, and that’ll give you time to focus on other areas of your business.

Three months later you come back, you’ve gotten a lot more knowledge, you’ve got a lot more topic ideas… Do the same thing again and constantly push those emails that aren’t as aligned with your business out months and months and months, and eventually you’ll have an entire year of outgoing email campaigns, so that you can spend your year focusing on operating the actual real estate or other things regarding content creation.

Theo Hicks: That’s a fantastic strategy, very specific. I really like that. But that’s kind of step two, but first I need to have my list of these investors. So you said that what you did wrong was you were trying to find people who weren’t interested in real estate and converted them to real estate. Instead, you wanna find people who are already interested in real estate, educate them on the deals that you do… But it seems like that’s what the article part is. But how do I actually find these people and get them on my list in the first place?

Hunter Thompson: Yeah, so the way that I’ve been able to do this is in effort towards those content creation strategies. So we did not do paid marketing. I used to go to 3-5 networking events every single week; that’s fine, but it didn’t really help the scalability. So from my perspective, the pursuit of actually creating that content will attract thousands of people.

Now, of course, the content has to be quality, but write the content with that in mind. The goal should be to write something that your friends and family, and also the people that are interested in investing are interested not only in reading, but sharing with your friends. This is how you get things to become viral.

Now, if you wanna supplement that with paid marketing, that’s totally reasonable. I know a lot of people that have done that and have had success, but that just hasn’t been the route that we’ve used. So from my perspective, really the creation of the content will attract the right people.

Theo Hicks: Perfect. So you create the content, you’ve got the emails going out, you’ve got the blogs going out, people are reading these… How are you converting them into investors?

Hunter Thompson: You kind of work your way up in terms of sophistication. I’m a huge proponent of writing a really quality eBook. This is something that’s probably 10,000 words. If you have a topic that you think is really compelling that’s kind of evergreen — like “Stock market versus real estate” I think is the name of Michael Blank’s book. It’s a great example. That’s always going to be something that he can use.

In an eBook I like to use more things like detail, data, graphs, back up the claims that you’ve made in some of the articles that you’ve mentioned, and be very aware of who your readership is going to consist of. I don’t think it’s wise to hyper-niche yourself into “Single moms with dogs” type of stuff, but you definitely wanna have an idea of who your ideal investor and who your ideal reader is.

Now, if you don’t really like writing, for example, you can outsource this. One of the things that we’ve done – and I know that you guys have done as well – is have a friend interview you on a topic that’s very specific, do a one-hour interview, then convert that interview into a transcripted eBook. Just go to Rev.com, it’s about a dollar per minute of audio. If you wanna email me at info@asymcapital.com, I’ll shoot you an email of one of our transcripted podcast interviews we’ve done… It’s the easiest way to do that.

By the time that someone goes through reading an eBook that you’ve written that’s in that 10,000-word range (about 45 minutes to read), they’re going to be very interested in moving forward with you. Then you can move forward with the actual sales process, and looking at the particulars of the deal… But from my perspective, having a combination of articles, maybe some interviews that you’ve done on podcasts and this eBook will get you so far along the lines that by the time you get on a phone call with someone, if that’s required, you’re going to be basically answering questions that they have, as opposed to trying to hard-close them, which is not scalable and not a good idea in the real estate sector.

Theo Hicks: Do you wanna walk us through what a typical conversation would be like for someone’s who’s read your eBook, or read some of your blogs, and then you schedule a call with them and you’re kind of having a conversation with them to get them to invest? How would that conversation go?

Hunter Thompson: Yeah, certainly. I’ll start by saying this – not only is it good for credibility, it’s actually good for you and your time as well to make everything as systematized as possible. So if you’re gonna be doing anything, whether it be having a phone call, writing an eBook, writing some articles, ask yourself “Why am I doing this? How can I make this systematized?” So for calls, I like to say there’s only two reasons to jump on a call with an investor. It’s either to have an introductory call, which is usually 30 minutes, or a due diligence call, which is usually 30-60 minutes, depending on the types of questions that they’re asking.

So when I jump on that first introductory call, my goal is to listen to their story, establish if they’re accredited, I want to learn about their experience investing… And here’s the really important part – I wanna hear their motivations for investing. Now, if you do 100 of these calls, you’re gonna hear the same things over and over again, so don’t block out the actual answers that they say. Listen to the nuances, because the nuances are gonna come up voluntarily.

You may hear things like “I really like the cashflow, because I wanna pay off my expenses in order for me to retire.” Or “I wanna invest in deals that have predictable outcomes, as opposed to the stock market, which I don’t really trust.” Then the conversation will transition over to me, and I’ll talk about two really important things here – my last straw moment, whether it be in the stock market or when I realized that my other career wasn’t going to get me the financial freedom that I was looking for, why did I transition out of a typical lifestyle into the world of real estate.

The reason this is important is that we didn’t learn about alternative investments in high school and college. Everyone that’s having this conversation with you – they have that moment when they realize “This typical way of thinking about money is not going to get me anywhere.” So I transition from the last straw moment to my key motivating factor, and really address what motivates me to help people invest like this.

Then I directly address their reasons to invest, whether it be the cashflow, the lack of predictability of the outcome, or the fact that they think the stock market is too high, and say “That is absolutely correct.” I affirm that those fears are genuine, but there’s another way… And that’s when I outline our general investment thesis, answer any questions that they have, and make sure to stick to the time commitment, which is that 30 minutes.

The introductory call – half of it is about creating that credibility, and the way to create credibility is ensuring that they know that your time is limited, as well as the investment availability. So that’s kind of a brief introduction to introductory calls.

Theo Hicks: Perfect. Is there anything else as it relates to how to attract investors, establish credibility and fund deals that you wanna talk about before we close out the call?

Hunter Thompson: Yes, I’ll say this – your willpower is limited. There’s been many scientific studies about this – people have limited willpower throughout the day, but also over the long-term as well. The reason I say this is that it’s absolutely critical to find a mentor that you can inspire them to share their playbook with you… Because that’s gonna help you get over those humps when you run out of that free will. You’re gonna feel exhausted. But if you have someone that you know has succeeded and they’re depending on you to succeed, it’s absolutely helpful to have them push you along. The number one way to inspire this is just to have a real significant sense of urgency about accomplishing your goals.

Mentors are so drawn to momentum… So if you can show that mentor you attract the right people… And that’s someone that not only has helped me in my career, but I’ve also helped other people, when I’ve seen their momentum and wanna help them along.

Theo Hicks: Well, Hunter, very powerful content. A lot of these things I hadn’t heard of before, I hadn’t thought of in this way, so it’s been a very good interview for me as well. I’m actually looking forward to taking a look at your book as well. Again, that is “Raising capital for real estate: How to attract investors, establish credibility and fund deals.” A link to that will be in the show notes.

Thanks again for coming on. Just to summarize — I can’t summarize everything, but some of the big takeaways that I had… I really liked your time batching concept. How you implement that is you will do things in increments of 60 to 180 minutes. The specific example you gave was you will write down 100 topics for articles in that timeframe, and then you’ll put them in Excel, and then assign them a numeric value based on how powerful you think the article will be. Then you will write an article about the top 10 articles, and then you will write smaller, shorter emails about the remaining topics. You repeat this process every three months, with the goal of having a year’s worth of content, so you can focus on other aspects of your business.

Something else I really liked on the content creation was the eBook idea. If you don’t like to write, a perfect way to overcome that is to have a friend interview you on a topic that you want to write about, that you’re very knowledgeable about, have it transcribed and turn that into an eBook.

Then lastly, we talked about when you’re actually talking to an investor on the phone, and the only two times that you believe you should talk to an investor on the phone is [unintelligible [00:21:43].10] or a due diligence call, and you walked us through exactly what you will do during that due diligence call. Basically, the outcome is to figure out what their motivation for investing is, making sure you’re listening to those nuances, and figure out what they’re (in a sense) fearful of; then affirm that those fears are genuine, that there is another way, and that’s when you present your option to them, and always making sure that you stick to the time commitment.

So again, Hunter, really enjoyable conversation. Looking forward to checking out that book. Best Ever listeners, thank you for tuning in. Have a best ever day, and we will talk to you tomorrow.

Ali Boone is the founder of Hipster Investments, which focuses on connecting investors to hands-off turnkey investing opportunities. In this episode, Ali talks about the advantages of working with a turkey marketing company who vets out turnkey providers to find the best, non-biased option for you. She also explains how to combine the BRRRR model with a turnkey property so that you are able to keep any forced appreciation.

Best Ever Tweet:

“If you have the risk tolerance and you really know who you’re working with, [the BRRRR and Turnkey combo approach] can be a fantastic option for the people who want to take advantage of the BRRRR advantages but don’t have the time, energy, or interest in doing the work themselves.” – Ali Boone, Hipster Investing

Ali Boone Real Estate Background:

Founder and owner of Hipster Investments

Has facilitated over $18 Million in Real Estate Investing Sales in first five years of business

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. First off, I hope you’re having the best ever weekend. Because today’s Sunday, we’ve got a special segment called Skillset Sunday. The purpose of today’s episode is to introduce you to a new concept called– well, it’s a BRRRR model plus a turnkey approach. With us today to talk about that is Ali Boone. How are you doing, Ali?

Ali Boone: I’m good. How are you? I was waiting to see what word you came up with for this model. [laughs]

Joe Fairless: A little bit of context, Best Ever listeners, it’s the BRRRR model and turnkey. So Ali said maybe it’s the BRRRR-key model… So we didn’t know exactly what to call it. She’ll describe it in a moment. First, just a refresher about Ali. She’s the founder and owner of Hipster Investments. She’s facilitated over $18 million in real estate investing sales in the first five years of business, author of over 170 articles on BiggerPockets… And not one, not two, not three, not four, not well, five years ago, so five years ago she was on the show, Episode 40, four zero, and it’s called “Love is in the Air”. Wow, that’s a funky title to the episode.

Ali Boone: My suspicions are sky high right now. I’m like, “What did we talk about?”

Joe Fairless: I’m interested in what we were talking about, too.

Ali Boone: Someone go listen to it and report back.

Joe Fairless: Right. I, for some reason, titled it “Love is in the Air”. You can go listen to it. We’re gonna be talking about the turnkey and BRRRR method combo approach. First, Ali, if you can just catch us up to speed, what you’ve been up to, and then let’s roll right into this combo approach.

Ali Boone: Cool. Man, I’m like, “What’s happened in the last five years since we talked?” I’m still wondering what “Love in the air” is. So I started Hipster Investments, I think we’ve just hit our 7th anniversary. For anyone not familiar with the company, we’re basically a matchmaker service, we focused on turnkeys up until now. Over the years, probably even since we last talked, I realized that we actually serve a second role, which is emotional support dog.

So over the years, we’ve probably worked with hundreds of turnkey buyers at this point, and turnkey, they’re a great thing for new investors. But new investors are often a little more scared, fearful of not understanding what the process is going to be… So there’s questions, and if a challenge comes up, we really step in and help support them.

I think my favorite thing about the company and just over the now seven years that we’ve been doing this is, I’ve really tried to make it a point to just seem different, in an otherwise stuffy, intimidating industry sometimes. You’re never going to catch me dressed up or in a suit, I’m probably gonna be the first person to tell you not to buy a turnkey. I just really wanted to keep it real and really build relationships. We’ve totally done that over the last few years and I’m so proud of our team and the company. It’s just it’s been a really cool place. As everybody knows, we’re now 2019 and it’s a very different dynamic real estate-wise than it was five years ago when we talked, and seven years ago when I started the company, as far as where the prices are, where the returns are. So we’ve had to do some innovation, because the turnkeys are typically sold at market value anyways, and market value right now is on the higher end. So everybody has an interest in this BRRRR model, and now we work with this opportunity to combine the two. So it’s been a really cool thing and I’m super stoked to talk about it.

Joe Fairless: Well, before we get into it, just to crystallize in listeners minds’ exactly what you’re company does know, are you a turnkey provider? If not, how do you work with turnkey providers?

Ali Boone: Great question. I’m glad you asked that. We are not a direct turnkey provider. So in the turnkey equation, you have the turnkey investors, obviously. Then you have the turnkey providers, who are the ones that physically produce the property. They’re the ones rehabbing it, they put tenants, you buy the property from them.

My company and myself are essentially a middleman. So some people call it turnkey promoters, turnkey marketers, and typically any company in this category probably works with several different turnkey providers. The advantage to that – and obviously, I’m a little biased because I am one of these companies, but I think there’s a huge advantage to working with a company like ours, because, first of all, we don’t charge you anything to do it. But if you go direct to a turnkey provider, there’s a lot that you may not know. First of all, how do you know they’re a legit turnkey provider? Then second, if you’re looking at your overall portfolio, how do you know where to buy or what to buy. If you’re trying to do some portfolio strategizing, the turnkey providers, if you say, “Hey, where’s the best place that I should buy?” They’re like, “Well, obviously, the city that I sell in.” All of us are holding a little bias in the equation, but they’re holding an extreme amount because they only sell properties in one market. If you say, “Hey, are you a legit turnkey provider?” They’re going to say, “Well, obviously.”

There’s just a lot of unknowns in the equation. So where the middleman comes in, is we are less biased, because we have access to turnkey providers in several markets. We have the experience with turnkeys that we’ve vetted these companies. We know the signs to look for, we’ve seen everything. So we really put a lot of time and effort into a) researching the markets and b) researching the turnkey providers. We can offer that list of people to you, the investor.

Then of course, turnkey providers have never been known for their customer service skills, with a couple of exceptions. For the most part, you’re not getting your hand held by these guys. They are very good at what they do, which is the technical side of finding the properties, rehabbing it. They’re moving fast and they don’t have time to hold your hand, and we do. So we really serve as that customer service buffer. I always joke about– it’s a very common thing that at some point, every turnkey provider goes through a stage of psychosis. So if that happens or any dynamics change, we’re on your side. You’re really coming in as a part of a bigger team versus just going at this alone. So that’s why, again, obviously, I’m biased because I am one of these companies, and it’d be great if you work with me, but you get all this for free from most of the turnkey marketing companies, whether it’s mine or anybody. So that’s where all the players fit into this equation.

Joe Fairless: And how are you compensated in that role?

Ali Boone: We all make money on the seller side in the terms of a referral fee. So if I send you to one of these properties, the seller pays me the referral fee. So that’s why the buyers don’t have to pay anything. I like to be really clear about that, is there’s always thought, “Oh, well, you’re only sending me to this property, because you’re going to make a referral fee on it.” I can’t speak for all the turnkey marketers, but for me, one of the most them important things that I’ve always been huge on is, I’m not going to send you to a company that either I haven’t bought through myself or I’m not somehow so closely tied to that I would send my mother there.

Over the years, especially as my name has gotten bigger in the turnkeys, I’ve had every turnkey provider under the sun offer me referral fees. In most cases, they’ve offered me higher than what I actually make, and I’ve turned them down, because either I don’t trust their company or I don’t know their company, or for whatever reason. So just a little disclaimer on the referral fee side. But yeah, it works out great, because it leaves the investors free to shop around and figure out what they’re doing without having to make a monetary investment into it.

Joe Fairless: I solved the riddle for why I titled the last episode what I did. Should I say it now, or should everyone get to go listen to episode number 40? Your choice.

Ali Boone: Man, that is a toss-up, because I want to go listen to the episode, but I want to know the answer.

Joe Fairless: I described you as “Meet the real estate matchmaker.” So it’s love in the air.

Ali Boone: Oh, fun. I like that.

Joe Fairless: There’s the connection. Once you mentioned your mom, I remember you talked about your mom on that episode, too. You said you wouldn’t send someone to a property or company that you wouldn’t send your mom. Then I asked you, “Well, do you have a good relationship with your mom?”

Ali Boone: Yeah, I remember that actually. [laughs] And you were like, “Wait, let’s clarify. Do you like your mom?”

Ali Boone: I love that. If anyone listening can ever replace the BRRRR acronym, I don’t care if it’s related to turnkeys… Please, I hate that acronym. It’s so many R’s. As if that wasn’t already bad enough, now we’re adding that to turnkeys, because that’s not super-obnoxious. Okay, so here’s how this works. The regular turnkey model is this – the turnkey provider, they have access to a whole bunch of distressed inventory. They go out, they buy the properties themselves, they fund the rehabs, they complete the rehabs, they put tenants in and they have property managers on standby to manage the property once you’ve bought it. So you as the buyer, you don’t have to put a dime into this investment until closing, which means you have the opportunity to verify that everything has been done correctly, that the property is as it was advertised. It’s a really cool system, aside from your hands off anyways, but you get the chance to verify everything before you put a dime into it.

Essentially, in that equation the turnkey provider is the one holding the risk during that whole time because it’s their money in the pot. So the downside of a standard turnkey model is that you’re going to be paying somewhere around market value for this property, and there’s really not an option to force appreciation. Number one, you’ve already paid market for it anyways, and number two, the property’s already completely improved. So you can’t do that. The only way really at that point is if the market itself improves, but where we are today that that’s not a huge thing.

So the upside is you get to verify everything, you get a fully completed product, your money is not at risk until you verified everything, but the downside is you’re paying market value and you can’t force appreciation. Well as most people in real estate know, one of the greatest tools or vehicles for financial wealth is that ability to force appreciation. So the BRRRR model by itself is you go find a distressed property, you buy it, you rehab it, and suddenly the value of that property is worth more than what you put into it.

So combining those models, where the shift from the BRRRRkey is, is the turnkey provider is still involved and all the same processes are still happening as far as getting the distressed property, rehabbing it, putting tenants and yadda-yadda-yadda. Except this time, you’re the one funding it. So they’ll help you select the property, you buy the distressed property yourself, you close on the property, and then you fund the rehab. It usually happens in phases. You’re not just slapping all your money down right off, but you’re giving them the money to do the rehab. So this is where it combines the BRRRR model and the turnkey. The turnkey side of this is that you’re still mostly hands-off, other than basic due diligence and all that stuff. But now because you’re the one funding it, you’re the one who gets to keep the forced appreciation on the other end.

So let’s say you buy the distressed property for $60,000, and the rehab cost $40,000. So you’re a $100,000 in, and now it’s worth $130,000. Well, that’s your equity. So at the six-month mark, you can do a cash out refi on the $130,000, and you’re actually able to pull out more money than you would have… Oh, I jumped ahead and I’m gonna confuse it… But you’re gonna get more of your money back in your pocket. I mean, I jumped, but on the standard turnkey model, if you put 20% down on the property, which is what’s going to be required for financing, let’s say you want ten turnkey properties; well, you’re going to have to have ten sets of 20% down, because you can’t force anything, or appreciation, and all that stuff. So with this, if now the value is $130,000, but you’re only $100,000 in, you actually get to pull more money out, so you’re not out the entire flat 20%, if that makes any sense. Or if it doesn’t, somebody email me. I’ll clarify.

But the moral of the story is you now get that forced appreciation that you would have, had you done all the BRRRR model yourself, but the turnkey providers were doing that. So that’s the super, major, huge upside.

The downside is now it’s your money at risk, and that’s huge. So the key with all of this is, you have got to know the turnkey provider you’re working with. A lot of them who will offer it, because if you say, “Hey, can I fund this and you guys do the work?” They’re gonna be like, “Yeah, obviously.” But if for some reason something goes wrong, you own that property, and it’s your money in the pot, so there’s a lot at risk. I don’t necessarily recommend this model for brand new investors or people who are just going to get their feet wet because of this. But if you have the risk tolerance for it, and you really know who you’re working with, and I mean really know, it can be a fantastic option for the people who want to take advantage of the BRRRR advantages, but they don’t have time, energy or effort or interest in doing all the work in themselves. So that’s the BRRRR-key model.

Joe Fairless: With the turnkey companies, I thought they made a lot of their upside on how much they originally buy it for, and how much they sell it to investors for, because it’s close to retail. So if an investor goes to them and says, “Can I fund this and you guys/girls do the work” why would they say yes? Because I thought that’s where they’re getting most of their profits.

Ali Boone: Well, it’s situational. A lot of the turnkey providers actually don’t make as high of margins as people think they do on essentially the flip, if you want to call it that. In this model, in particular, they’ve built their profits into the rehab costs and just the general work costs and all that stuff. Because the major advantage to them– while they may not make as much per property, it’s a huge thing to be able to use other people’s money. Because that’s where a lot of turnkey companies really get limited, is they only have their own money to do this, so they can only do so many at a time. So now that they’re working with other people’s money, and they’re not having to pull from their own pot, they can actually crank out a lot more of them, and still come out on the other end with their profits [unintelligible [00:15:22].24] while serving more investors at the same time.

Joe Fairless: Okay. You mentioned, “You must really know the operator.” What are some ways to qualify the operator?

Ali Boone: First, I would absolutely hands down look for people who have already been through with them and had a good experience. We started working with a provider on this model a few years ago, actually, and we had worked with this provider prior to that for years on the standard turnkeys. We probably had more people buying from him than any provider that we work with. Everything had gone really well and he had started getting more into this model, so we watched him do it for a couple of years to really make sure that this was happening as it should. He did really well with it and everything was going great, so we suddenly started advertising these.

Then it didn’t go great. People were cautioned ahead of time that, at the end of the day, we can all vouch for it, we can all say we believe this can be good, but this is your money at risk. So you’ve got to go into it with your own due diligence, with your own confirmation. If you want to go visit the provider, boots on the ground – yes, go do that. But I would say more than anything, look for people who have already done it with them successfully and had a good experience.

I would say, one of the key things I look for– and this is even outside of BRRRR-key or turnkeys, or whatever… Whether it’s property managers, whoever. For me, one of the biggest signs is communication. I can see a huge correlation with the people who have not performed well and their communication levels. I’ve rarely seen it where someone communicates everything really, really well and doesn’t also perform. So that’s a very vague measurement, and not one you can go off by itself, but that’s something, that’s part of what I look for. But really, look for those success stories and look for people saying that this is legit.

Joe Fairless: It was working with that one individual until it wasn’t. Do you know what changed?

Ali Boone: We are all actually still trying to figure that out. [laughs] I mentioned earlier, half joking around, but I’m kind of dead serious, too – this isn’t just turnkey providers. I’ve seen it with property managers, different companies, there’s just a cycle sometimes. This could actually go into your considerations for who to [unintelligible [00:17:35].09]for. The cycle that I’ve seen with property managers, turnkey providers, everybody, is somebody in the beginning is really, really good at what they’re doing. So people start buying into them, like, “Man, this is fantastic.” So they tell everybody they know, and suddenly everyone’s buying through these guys. For the most part, these roles, like I said, they’re really good at what they do, but they’re not necessarily good at business skills or whatever it is. So quite often I’ve seen it where when the company grows too fast, they don’t manage that well. So when they get overwhelmed, they almost start getting into this desperation type of thing and they just start making poor decisions. That’s when the cycle starts. That’s when I say they flip into psychosis at that point. All of these things are very fluid.

So one thing about the BRRRR-key provider we’re working with now, he’s at the beginning stages. He’s been doing it long enough to know what he’s doing and to be very well versed in what’s actually happening, but he hasn’t grown so much that he’s teetering this outgrowth, if you want to call it, outgrowing the capabilities of the company. The guy that we worked with before, he was on the other end of the cycle. In hindsight, really looking back at this, he was past capacity, for sure. So I don’t know what in that mix exactly was the thinking of things, but his communication had really fallen off, and he’s still married… Like, what happened to this guy? [laughs] Sometimes things just kind of happen.

I know this is a sidebar, but there was a Chicago turnkey provider that we worked with – this was years ago – and it was like overnight things stopped performing, and we’re like, “What in the world is happening?” Unfortunately, in his case, he had a brain tumor. It came out of nowhere, it became a thing and he has actually since passed away. But people need to remember that everyone’s a human in this equation. And humans, unfortunately, are not perfect or consistently reliable all the time. With that said, that’s why I encourage people, really don’t go at this by yourself. Because when you have a team of people, it brings on a bigger force to really support you and your investment.

Joe Fairless: Anything else as it relates to this combo approach that we haven’t talked about that you think we should?

Ali Boone: Not that I can think of. Just on the logistics side, like I said, normally you buy the distressed property, you fund the rehab in phases. Once you verify and some percentage is complete, you put more down. Then what they’re gonna do after that – I don’t think I really got into the side – is that once the property is rehabbed, they place tenants, just like a regular turnkey situation. So then you’re actually making the cash flow also. Around the six-month mark is when you have that cash out refi ability. So your money is gonna be in the pot for about six months doing this. But then at that six-month mark, that’s when you can go ahead and start to pull that out.

Of course, I’d say that’s your strategy, make sure ahead of time that you have reason to believe you’re gonna be qualified for a loan… And worst-case, if you don’t pull that money back out, you still own the property, have the equity and have the cash flow coming in, but you don’t get that money back out. So just some random considerations. If anyone has any questions, because it’s a condensed discussion, then they can always reach out for sure.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and then reach out to you?

Ali Boone: I actually set up a link specifically for your listeners. I did not have this five years ago. I wonder what my website looked like five years ago. So I set up a link, it’s hipsterinvestments.com/bestever. On that page that it takes you to– so a few years ago, I wrote a turnkeys eBook that we still sell. On this page, it’s going to offer you guys this eBook for free. So you can type in your email address, get the eBook for free, whereas everyone else is paying for it. Also on my page, there’s all sorts of links to connect with me and you can reach out anytime.

Joe Fairless: Oh, well, thank you for that. I will make sure that we get that in the show notes. So Best Ever listeners, you can just click the link that’s in the show notes and it will take you directly to the page. Ali, I enjoyed our conversation, as always. We will talk again in five years, of course.

Joe Fairless: Yeah, we’ll ramp it up a little bit more. Thanks for talking about this approach – two methods that have proven to be effective for real estate investors in certain situations – turnkey as well as the BRRRR method, and doing the best of both worlds. I love that you looked at it in a very objective standpoint and you talked about commercial downsides and how to mitigate that as much as possible.

There’s risk in investing, there’s risk investing in turnkeys, there’s risk investing in our deals, there’s risk in any type of deal. So there’s always going to be some potential downside, so how do you mitigate that as much as possible. Thanks for being on the show. I hope you have a best ever weekend, and we’ll talk to you again soon.

Reed Goossens has returned to the show with his Best Ever advice for raising capital. Reed is a real estate entrepreneur and Managing Partner of Wildhorn Capital. As a native Australian, Reed moved to the U.S. to pursue his investing career in early 2012. Reed is a qualified chartered structural engineer and project manager. Since 2007, Reed has been involved with large scale commercial construction and real estate development projects, with a combined worth over $500 million; in Australia, the United Kingdom, and the U.S.—highlighted by his work in London in anticipation of the 2012 Olympic Games.

Best Ever Tweet:
“People don’t remember a great pitch, they remember a great conversation” – Reed Goossens

Reed Goossens Real Estate Background:

Founder of Wildhorn Capital, a large multifamily investing firm

Host of the podcast “Investing In The U.S.” Best selling author of two books

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Sunday I’ve got a special segment for you called Skillset Sunday. And here is the skill – a lot of you are going to like this – it’s the six P’s of raising capital like a pro. With us today to talk through that, Reed Goossens. How are you doing, Reed?

Reed Goossens: Good day, mate. Thanks for having me back.

Joe Fairless: Yeah, nice to have you back. And as I swig water, because I was choking on a bean that I was eating earlier, I am looking forward to our conversation. And you said, “Nice to have me back” and that is because you loyal Best Ever listeners know this – Reed was a guest on this show twice, actually. One, episode 102 titled “YOUR Blueprint for Getting Started in Real Estate.” And that was a long time ago. [laughter] And then, let’s see. Well, the date — okay, I’m looking at it… It aired December 13th, 2014.

Reed Goossens: Wow…

Joe Fairless: We’ve known each other for a while… And then the next episode, Episode 593. It’s titled “Feeling Re-entitled? GOOD, Because Here is Why it Means Big Business!” and it’s a Skillset Sunday episode.

So today we’re going to be focusing on the six P’s of raising capital like a pro. Reed’s in the middle of his book tour. Reed’s also the founder of Wildhorn Capital, a large multifamily investing firm, host of the podcast Investing in the US, and author of two books. So first, Reed, how about just give us a refresher on your background and your current focus, and then let’s dive right into the six P’s of raising capital.

Reed Goossens: Sure. So for everyone who didn’t listen to those many years ago, I’m originally from Australia, I moved out here in 2012. I just quit my job in Aussie and just wanted to follow a dream; I moved to New York City, I fell in love with an American girl, I fell in love with New York City. I came here, didn’t have a job, didn’t go to school [unintelligible [00:03:22].05] I found a job pretty quickly, and I think within six months of moving to United States, I had purchased my first triplex for 30,000 bucks. The barriers to entry are completely different in Australia than they are here in the US.

My background’s in structural engineering, and since 2012 I now control with my business partner Andrew at Wildhorn a $150 million worth of multifamily real estate, and I’ve been really enjoying the journey. I’ve obviously got my podcast as well and a couple of books out.

So that’s really the focus in the last seven years. And my whole mission and little motto is, “If I can move 10,000 miles across the globe and achieve financial freedom through US real estate, then so can the average Americans. Just gotta get off the fence.” So that’s a bit of the elevator snapshot, pitch, or whatever else you would call that.

Joe Fairless: What’s your latest book about?

Reed Goossens: My latest book is called 10,000 Miles to the American Dream. About three and a half years ago I brought together a group of seven other Aussies – all Aussie blokes – who had made a pilgrimage to come across the Pacific and make a go over here in the United States. And I started a mastermind. Through that mastermind we just did a monthly call at the beginning, we met up a few times, and then we said, “Hey guys, we need to write a book, share our story with the world.” And each one of us wrote a chapter, and that book has just been launched on July 4th, 2019. We just started the book tour in Asheville, and it’s going really, really well. It’s called 10,000 Miles to the American Dream, our story of financial freedom, and again, there’s a lot of Aussie-isms in there. And if Aussie blokes can move halfway across the world and achieve financial freedom, then so can the average American.

Joe Fairless: Are there only eight chapters?

Reed Goossens: There’s only eight chapters, but it’s quite dense.

Joe Fairless: Those are big, big chapters?

Reed Goossens: They’re dense chapters.

Joe Fairless: How did you all divide and conquer? Are they chapters that stand alone or is there a flow to it?

Reed Goossens: Good question. Surprisingly, we all had our different niches in real estate. So one of the guys is into real estate technology. He came out here and started a real estate technology firm in Silicon Valley. Another guy is into mobile home park investing, another gentleman has started a complete fix and flip business in Texas, I’m also involved in multifamily and a bit about branding and raising capital… There’s a few other people who know about the philosophy of growing wealth and how to grow wealth… So really just different aspects. There’s a hotel investing chapter in there as well, because one of the gentlemen is in hotels in San Francisco… So a really wide range of stuff, but in and around my story of how I brought everyone together and really was just like, “Okay, let’s have a beer”. Being an entrepreneur’s kind of lonely, so I want to surround myself with other Aussies who are doing the same thing, so that’s what we did.

Joe Fairless: You are on your book tour now, you have a presentation, and that is the six P’s of raising capital like a pro.

Reed Goossens: Yep.

Joe Fairless: I would love to learn that.

Reed Goossens: Sure. So through just observation, when I first moved to United States, I saw all these people, including yourself, Joe, just emulating these six P’s. And I sort of sat down and wrote an eBook, and I actually started with four P’s, and then I added two more to them. So without further adieu, let’s just dive into it.

The six P’s are as follows – it’s Professionalism, Pitch, Practice, Profile, Platform and Patience. And I’ll go through them one by one. The professionalism part, the first P, is really about being professional. A lot of people are concerned and have these mindset barriers that “I can’t get involved in real estate because I don’t have all these years of experience.” Well, I mean to tell you that no one is born with 10 years or 15 years’ worth of real estate investing experience. We all have a story, we all have a journey… And that is where you have to lean on past careers or past journeys to bring a professionalism to the table that people are gonna wanna invest in. And that really starts by just rocking up, being punctual, dressing correctly, being on time, making sure you’re articulate in trying to get across a message. [unintelligible [00:06:40].13] people, one that some people tend to overlook, and it’s in and around mindset. The second P–

Joe Fairless: Well, a question on the professional part and dressing appropriately. So should everyone wear suits and ties, or really fancy dresses? …I don’t know, what women wear to make them look professional, but business pants or whatever?

Reed Goossens: No. It’s uniquely you. This whole six P’s is about unearthing what is you, and really looking deep into yourself, and looking deep into what your brand is going to be, to then emulate it to the world. You obviously don’t look like a slob, but look at the Mark Zuckerbergs of the world. They coined the fashion of just wearing a hoodie and jeans on stage. So definitely, we live in a world where professionalism means a different bunch of things, and looking one way is just one part of being professional. Obviously, the way in which you host, your presence, being communicative with your audience, with your investors, and really laying the foundation to be a thought leader in your sphere.

Now, you don’t have to go out and be the next Tony Robbins or the next Joe Fairless, but you can be a key person of influence within your sphere, and that’s what you have to realize – that we’re all standing on a mountain of value, and that value needs to be shared with your sphere, and people will come to you as being the real estate expert, and that’s really the whole purpose of the first P.

Joe Fairless: Okay. Pitch.

Reed Goossens: Pitch. Awesome. So pitch is – I love this – pitching effectively is really quite hard, and in the chapter that I wrote, it’s all about pitching effectively. I’ve coined this little phrase – Pitching, there’s three levels of pitching… There’s social pitch, there’s a scheduled pitch, and then there’s a sales pitch. A social pitch is where you deliver that in a social setting. People never think when they leave a networking event or anything like that, that “Oh, geez! That was a really good pitch!” A really good pitch is really a good start to a conversation.

So the way in which I’ve formed the pitching formula is really quite simple. When you’re in a social setting, you want to have your social pitch ready, and we’ll talk about that in 30 seconds… But then, from a social pitch you want to get out your phones, and you want to get on a scheduled pitch, which is maybe a coffee or a beer, or get on the phone together… And that will be at some later point in time. And in that intermediary time, you’ve got to send them the pitch deck, a little bit of data about yourself, maybe direct them to your website…

And then the final pitch is the sales pitch, where you have a live deal and you’re answering investor questions and objections or whatever that might be. So pitching effectively and the whole ecosystem of pitching is really going from social pitch to scheduled pitch to sales pitch. And when we’re in a social setting, the whole Martin Luther King pitch, the “I have a dream”, you’re not going to change someone’s mind with one pitch, and your pitch will need to be practiced thousands and thousands of times. And like with Martin Luther King, he practiced it many, many times across the South before it became on the Washington Monument. And that’s the way we all have to pitch as well.

So I’ve come up with this little way of– it’s a little form. It’s called Name, Same, Claim to fame, Goal of the Game. And I’ll repeat that, again, its Name, Same – so I’m Reed Goossens, I’m a real estate investor. My claim to fame originally when I first moved to United States was that I moved across the world, quit my job in Australia, and I moved to the United States to follow a dream. My goal is that I want to help 10,000 International folks realize the benefits of investing here in the United States in order to become financially free. So there is an effective pitch. It’s less than 30 seconds, it engages someone in a way that they wanna have a follow up conversation.

You never want to be pitching in a way where in Australia (or the British way) they pat you on the shoulders, and go “Well done. Good luck.” You want to evoke emotion. So when you’re pitching at someone, people like to hear something big and bold. Like the Martin Luther King “I Have a Dream” speech. It was emotive, it got people — it stirred emotions within someone. And you can have obviously positive and negative emotions, but you want to be able to become emotive, so people are engaged in what you’re trying to do in order to get to a scheduled pitch, to then get to a sales pitch.

Joe Fairless: I love the fame part, because it really makes us think about what makes us interesting to other people. And if we’re interesting to other people, then people will tend to gravitate to us. Quite frankly, we’ll just be in a more enjoyable conversation, because your journey is interesting – I’m sure you enjoy talking about your journey – and other people will find interesting as well. What’s something that people mess up on within the pitch category?

Reed Goossens: So over the weekend, I just did a whole-day seminar on it, and people waffle. And the whole idea of name, same, claim to fame, goal of the game – it’s about getting that waffling to a very concise 30-second opener. Essentially, you’re trying to open a conversation to lead into “Oh, so you moved halfway across the world? What’s that all about? Why?” People don’t remember a great pitch, they remember a great conversation, and that’s really what you want to have. A lot of people waffle on for too long and people are standing there who are receiving a pitch, scratching their head like, “What are you? Are you an investor?” You never want to be pitching someone and they’re scratching their head going, “I don’t know what you do or what you are.” So the name, same, claim to fame, goal of the game is a concise way of getting to the point really quickly.

Joe Fairless: Cool. Practice? Is that next?

Reed Goossens: Sorry. Professionalism, pitch, profile… Would you want to talk a little bit about– it’s 2019. You’re going to be on Google. People are going to Google you. So that is where people are going to have to say, “Okay, well, I’m going to invest with this person”, so I’m gonna have to have a website. I’m gonna have to professional images taken of myself – headshots, logos. All that stuff contributes to bringing that professionalism across to the table.

It’s not a really massive P, but it’s a P that is sometimes overlooked, and making sure that your profile is coherent across all different social medias – LinkedIn, Facebook, Instagram – that your message is the same is really important… And making sure you have something to say on your website, so when people come and want to find a little bit more about you, they know where to go. And for whatever reason, people like to see things written down.

We live in a day and age where a website is essentially the new business plan. So people want to go to your website, they wanna find out who you are, they want to read a little bit more about you, they want to read some blogs that you might have done, your thoughts on x topic. So it’s really important to have a coherent profile, and that starts with headshots, logos, websites and stuff like that.

Joe Fairless: Okay, it makes sense.

Reed Goossens: Next one is the platform… The platform being about how you’re going to get your message out to people. Right now we’re talking on a podcast, and I know Joe you taught me in back in the day that you can leverage certain mediums like YouTube or iTunes. or you can leverage writing articles. Whatever you do, you have to be consistent and you’ve got to choose a platform in which you’re good at.

For me, I didn’t particularly like writing, so when I started my podcast – audio always came really quite naturally to me. I tried videos, videos were okay… But whatever platform you do choose to communicate with your investors with, you have to be consistent. So whether you choose just to do a simple monthly newsletter, with a couple of blogs that you’ve written – fantastic. But you have to be consistent with it. I think the biggest thing people fail is they start something like a podcast or a blog, and they just give up after six months. And Joe, you know this, after doing 700-800 episodes, how important consistency is, and choosing that right platform and medium to get across your message to your audience. So that’s the platform P.

Joe Fairless: Have you started anything from a platform standpoint that fizzled out and you took a different direction?

Reed Goossens: Yeah, videos. I had a YouTube channel, it’s not very popular… But I tried to go once a week on the top of Culver City Hill and try to set up a camera and try to not have bags under my eyes… It was a lot.

Joe Fairless: [laughs]

Reed Goossens: It was just like, “Oh, this is such a pain… And then I’ve gotta edit the bloody thing…” It was just too much, so I now just record some video with my podcast, and I just drop the podcast… But it just didn’t work out as successfully as I thought it would. It just takes a lot more effort with the video space, so I niched into being more in the audio space.

Joe Fairless: Okay.

Reed Goossens: So we’ve got professionalism, pitch, profile, platform… Practice. So the practice is about going out and doing that scheduled pitch with your investors, in a circle of people who know you best, so your friends and your family. It’s sitting down for coffee and presenting them a pitch book or a pitch deck. Essentially, it’s a business overview of what you’re trying to achieve. In real estate we are trying to invest in whatever the specific asset class that you’re in, so it might be multifamily, it might be mobile home parks… Whatever that is, there’s something that if you hand a pamphlet or a brochure to an investor over coffee, it makes it real for them. And it really is taking that website that you’ve already created and putting it into a pitch deck, and outlining you core values, your mission statements, what you’re trying to do in terms of your investment strategies, how the investment’s gonna work out for the investor, and maybe some structuring questions, maybe a hypothetical or an actual case study if you’ve been involved in any deals… And that is where you sit down and you practice with it. And you practice, practice, practice, practice.

And I remember when I raised my first bit of money with you, Joe, I thought to myself, “Geez, I’m gonna raise half a million bucks” or whatever it was, and I went out and approached 50 people, and only three people invested. And it showed how much I need to double down on getting to grow my audience. But it was a real cold shower in terms of that practice part of it. You have to be consistent with it. If you think “I’m going to approach 20 people and I’m going to get all 20 people to invest”, well, you’re wrong. It’s gonna take a couple hundred of people for maybe three or five percent of those people to actually invest in your deal. So having that mindset going on the front end… And that’s the practice part of it.

Joe Fairless: And lastly?

Reed Goossens: Patience, my friend.

Joe Fairless: But we want it now! We want it yesterday!

Reed Goossens: Of course, right? We always want it yesterday. But like anything… Tony Robbins famously says, “You overestimate what you can achieve in a year, but you underestimate what you can achieve in a decade.” And ten years ago, I picked up the book Rich Dad, Poor Dad. Now I’m living halfway across the world and I control $150 million worth of real estate. I don’t say it to boast, I say it because it’s wow. I pinch myself every day. I work for myself. I’m like, “Holy crap. This is incredible.”

So patience is a virtue, and it takes time and it’s a snowball effect, and combining with the five other P’s, it will take time and it will slowly build. You’ll feel like you’re pushing a boulder up a hill, but you will get to the top. Then once you get to the top, it will just cascade down the other side.

Joe Fairless: On the patience front, how do you know if you should exercise the patience or you really are being a lot slower than where you should be?

Reed Goossens: Yeah, it’s good question. We’re all trying to run our own race. With the social media age, we’re looking at other people and going, “Oh, I wish I was doing that. I wish I was doing this.” It is about running your own race, it is about looking at your own situation and understanding “Okay, well, I’ve got a full time job. I’ve got a family to take care of. I can squeeze in a little bit of real estate investing or building my brand, say ten hours a week.” Whatever that is, you have to be consistent with it.

So that’s the patience part of it, the patience side of it, because life happens. You’ve gotta keep food on the table, you’ve gotta keep a roof over your head. For many years I had a W-2 job plus trying to do deals on the side, plus trying to find investors… At one stage, I thought, “Jesus, it’s never going to happen”, but I had to have that mindset that it will take time. And anything worth building will take time. So that’s really the patience part of it.

Joe Fairless: Thank you so much, Reed, for sharing the six P’s of raising capital, and best of luck on your book tour. I have really enjoyed our friendship and looking forward to continuing to– I’ll interview you in five more years. That way, we’ll have our ten year anniversary of when your first interview aired.

And really, truly, thank you for being on the show. I hope you have a best ever weekend. How can the Best Ever listeners learn more about what you’ve got going on?

Reed Goossens: Easy. Jump over to reedgoossens.com. And Joe, thank you so much for allowing me to come back on the show.

Our two guests today have been building a real estate investing business as partners for around 10 years. We’ll hear how they have divided up their roles and get any tips they have for forming a successful partnership. They will also tell us about some of their typical deals, and Joe will dig in to bring us some of the specifics. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“You got to get a feel for what kind of property sells more there” – Steven Jack Butala

Steven Jack Butala and Jill DeWit Real Estate Backgrounds:

They have been investing in real estate since 1999

Built a $24 million land resale empire, completing close to 16,000 transactions without incurring any debt or leverage

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today – Steven Jack Butala and Jill DeWit. How are you two doing?

Jack Butala: Excellent, Joe.

Jill DeWit: Great!

Joe Fairless: Good, I’m glad to hear that, and looking forward to our conversation. A little bit about their company – they’ve been investing in real estate since 1999, built a 24-million dollar land resale empire, completing close to 16,000 transactions without incurring any debt or leverage. Based in Los Angeles, California. With that being said, do you two wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jack Butala: Yeah, Joe, it’d be great. I cut my teeth probably 25-30 years ago as a commercial real estate broker, and quickly learned that I couldn’t stand to cold-call. So I devised this system to collect data for commercial real estate property owners, and back then – this is before the internet – I put together a system where I would fax them overnight blind offers for their property, with a pretty substantial degree of immediate success.

Fast-forward now to 2019, I got sick of doing those complicated transactions back then, and decided that buying land, and specifically unwanted land, for much lower than I could resell it for on the internet was the way to go… And here we are.

Joe Fairless: Got it, okay. And what were you doing when you started to collect data on property owners and fax them blind offers? How were you getting that information?

Jack Butala: It’s a great question. I’ve learned of my own interests – and I guess I would say now obsession – with data… And back then, the highest quality data that you could find (again, before the internet) was about healthcare-related office complexes, and nursing homes, and assisted living type facilities. For whatever reason, there was a tremendous amount of data collected on that, and with associated fax numbers.

So I literally took a phonebook-size book and input it in Excel and through some programming – I call it a form fax, but it’s really like a mail merge fax situation… So right around 2003 I learned about RealQuest Pro, which was back then the first American Title’s data arm. Since then, we’ve become license providers of that and several other data sources… But for us, it’s all about manipulating sending offers to owners, and getting the responses, and having all that traffic come back to you, and deciding what properties you wanna buy.

Joe Fairless: So how do you two divvy up responsibilities?

Jill DeWit: Good questions. I always say it’s “Make my phone ring”, whether it’s on the buy side or the sell side. When I came into this I had a very heavy sales background, and I am not afraid to pick up the phone, answer the phone, talk to people… Jack and his data – he’s not really into talking on the phone; he’s more about just getting it going, getting a response. So that’s what he does – he gets the offers out, he prices them, he makes sure it’s perfect, and then my team and I come in on the buy side, carry them all the way to completion, and then same thing on the sell side. That’s what my forte is.

Joe Fairless: Got it, okay. How long have you two been partnered up?

Jill DeWit: Gosh, going on — it’s a little over ten years now.

Joe Fairless: Tell us about a typical transaction.

Jack Butala: By the way, we buy land, we buy houses, small apartment buildings… So it’s not just limited to land any longer. But a typical land transaction for us – I have the spreadsheet now of what we have on the table… I’ll send out (I don’t know) 10,000 offers ballpark… We own a company called Offers to Owners, which is a bulk mail printing company, and we obviously provide a huge discount to ourselves, and to our Land Academy and House Academy members.

So I’ll send out 10,000 offers, it costs probably $3,000 to $5,000. For every 300-400 mailers we send out, we end up buying a property. So a typical deal for us would be — I’ve just reviewed one right before this call… It was a 40-acre property in South-Eastern New Mexico, just on the outskirts of town, surrounded by structures and stuff like that, for about 4k-5k. In that particular case we’ll resell the property through the MLS, probably, for about 20k, maybe 22k.

Joe Fairless: 22 an acre?

Jack Butala: No, it’s 40 acres, we’re buying it for about $5,000…

Joe Fairless: Total.

Jack Butala: …and we wholesale it for about $22,000.

Joe Fairless: Got it. I need to shift my gear into New Mexico prices. [laughter] You two are in L.A. so I’m sure you had to do the same thing.

Jill DeWit: Exactly.

Joe Fairless: Alright, $22,000 for 40 acres. So how are you finding these leads? What’s that process?

Jack Butala: I very simply take the entire universe of properties in a given county… If you can imagine, there’s houses, land, all kinds of stuff that you can dream up in there, and I scrub out everything that I’m not interested in for that particular mailer. In this case it would be houses, strip malls, any commercial property, any property owned by a municipality, cemeteries, hospitals, on and on and on. There’s a massive list. We actually have built algorithms to do this for us.

So what I end up with is a good, clean scrub of property that are owned by individuals, or let’s say LLCs, and they get an offer from us. It’s kind of more art than science at a point, where you have to price that. Our whole goal is to get them to sign the offer and send it back, or to call back and say “$5,000 doesn’t work, but $6,000 might work.” And then we go from there.

Joe Fairless: What are you scrubbing for exactly, in order to get from the initial list to the scrubbed down list?

Jack Butala: Likely sellers.

Joe Fairless: Okay.

Jack Butala: John and Sally Smith are very likely sellers. If they have a 40-acre property or a 20-acre property in the county that I’ve chosen, they are a very likely seller.

Joe Fairless: Why?

Jill DeWit: [unintelligible [00:06:56].17] We’re not trying to seek out any particular thing, it’s just that they’ve owned it… We don’t even look for how long they’ve owned it. And the whole goal here – the best part of my job is that people are calling back because our offer is in their ballpark. He takes all the work out of it. I’m not sitting here going down and cold-calling everyone in a county, saying “Do you wanna sell? Do you wanna sell? Do you wanna sell?”, or do I send out a generic offer that says “If you wanna sell, call me”, because then again, everybody will call back and they’ll all want top dollar. That’s not what we do.

We send out real strategic, professional, respectable offers to these sellers. They get them, and they open them, and they read them, and they say “You know what, Sally, I even forgot we owned this. Aren’t we still paying the taxes on it? We’re not gonna retire there. The kids don’t want it. I’m calling.” And then I get nothing but quality people. Again, he liked my price, it’s in their range, and we’re just gonna buy it and solve a problem for them, usually.

Joe Fairless: And what makes them likely sellers?

Jill DeWit: Usually because it’s paid for. That’s really what we look for. And most of the thing is rural, vacant land. It’s very hard to get a mortgage on. Most of it is paid for.

Joe Fairless: But you said that you don’t look to see how long they’ve owned it, so you don’t necessarily know if it’s paid for or not, right?

Jack Butala: What makes them a likely seller is this… Imagine this – if every single person who owns a piece of rural, vacant land that’s not developed, in a given county, with the exception of government entities, and any individuals and LLCs, let’s say, everybody gets an offer from us; every single person. And the likely sellers choose themselves. So we just blanket the whole thing with an actual offer.

So instead of us waking up in the morning to go find all these likely sellers, they find us. Jill wakes up, sits down at her desk, and there’s many envelopes literally to open that have signed offers in them, or her mailbox is full [unintelligible [00:08:51].20] to return the calls. So they find us. I blanket it.

Joe Fairless: And how do you determine how much to offer to make that a fair offer, as Jill mentioned?

Jack Butala: That’s an excellent question. It’s very different for specific product types. Three major product types that we deal in now are rural vacant land, infill lots, which are properties in an urban setting, and then houses. We buy tons of all three.

Rural, vacant land is a little bit more tricky to price, because you have to do a lot of research about what’s on the MLS, what’s on LandAndFarm.com, what’s on LandWatch.com… We own a site called LandPin.com… You’ve gotta get a feel for what properties sell for there. We try to come in at 20% or 30% of the actual retail price, and sell it for maybe 50% of its worth.

Joe Fairless: Okay. So that is with rural and vacant land. What about infill lots and [unintelligible [00:09:42].29]

Jack Butala: Infill lots is a function of what house values are in the very immediate area. Infill lots and houses are really exciting from a data perspective, because there’s so much data available in this internet age we’re in. So if a house sells for $200,000, if you asked any homebuilder, they’ll tell you they’re very will to pay 20% to 25% for the land on a house that they build. So if it’s $200,000, 20% of that is about 40k. I try to get in at 10k or 15k and mark it up about 10k and really quickly sell it to a homebuilder.

Joe Fairless: Okay.

Jack Butala: For houses it’s even easier.

Joe Fairless: So 20% to 25% of the value of homes equals the land value, as a rule of thumb.

Jack Butala: That’s right.

Joe Fairless: Oh, interesting. Okay. How does that fluctuate, if at all, from where you live to where it sounds like Jill is originally from?

Jack Butala: Ha-ha! Well, Jill and I started the company in Arizona, and we lived in a house that was about — I don’t know, we don’t live in very logical areas to do this in. [laughter] We live right on the Pacific Ocean, and I’m not sure that this whole model would work there. [laughter]

Joe Fairless: Right, right. But as far as that percentage though, just to estimate, would you say L.A. is still within 20% to 25% of home prices (the land equals) compared to Des Moines, Iowa, or something like that?

Jack Butala: I don’t wanna complicate this for your listeners, but…

Joe Fairless: Please, try. That’s fine.

Jack Butala: Okay. [laughter] There’s a construction cost component. In my mind, the rock bottom new construction cost is gonna be about $100/foot. If you’re really pulling out the stops, it goes to maybe $250, even $300/foot. So if you take our neighborhood, rural, vacant land goes for about 4 million bucks a lot. And when you pull out the stops and build a 3,000 sqft. house for $300/foot, that’s a million bucks. So now you’re sitting at a theoretical completed asset at 5 million dollars, that’s probably worth 7.

So you have to go in — there’s a lot of analysis upfront that I do when transactions happen in different markets. But I’ll tell you, we do really well in Phoenix, Las Vegas, Tampa… Those are the markets that are really high growth, in-bound population increase environments, and the real estate component of cost of living is very low.

Joe Fairless: What are some markets that you have been in, but you’re not longer in?

Jack Butala: I’m from Michigan. In all of Michigan I can’t get to work with any [unintelligible [00:12:21].14] and it baffles me. I’m not sure why.

Joe Fairless: Well, I was gonna ask you that, but you don’t have any answer to it [laughter] Okay…

Jack Butala: I’m not alone. I’ve really tried to figure this out.

Joe Fairless: Yeah… Because you find some land, and then you just can’t find the buyer, or you can’t find the land, or what?

Jack Butala: The yield – I micro-manage our mailer yield, and for whatever reason our yield is just atrocious in Michigan. I can send out thousands of letters and just not really get any real responses.

Joe Fairless: Even Grand Rapids area?

Jack Butala: Yeah. Seth Williams is in our space. I don’t know if you’ve interviewed him or know him…

Joe Fairless: Yeah, of course.

Jack Butala: Seth is really a hands-on — he’s got a 616 area code phone number, and he does okay there… But we do more of a shotgun approach to all of this than a rifle approach.

Joe Fairless: Got it. And what’s a market that you weren’t in, but you have now had a lot of success in? …if there is one.

Jack Butala: Northern and Central California are on fire for us.

Jill DeWit: Yeah.

Joe Fairless: Okay. And so what’s a typical deal there look like? Or maybe a specific example would be even better…

Jack Butala: I can give you a couple of examples. We’re doing several transactions in Lassen County right now. There seems to be a lot of subdivided 20-acre properties there. We buy them for 2k-4k each, and wholesale them for 10k-12k, maybe 15k, that week.

Jill DeWit: Easy and fast. They love them. Modoc is good… And we have some other great areas up there.

Joe Fairless: And Jill, switching gears a little bit to your area of focus – what are some typical objections that a seller has, and how do you resolve them?

Jill DeWit: Usually, it just comes down to the situation… Like, the kids will find it, and our only issues are sometimes undoing trust issues, and just kind of finding people sometimes. And then we can undo that. I have access to everything, and a lot of our deals [unintelligible [00:14:15].03] two titles, so they take care of them right there. But even before I get a two-title, I wanna make sure everybody’s alive and able to sign…

Jack Butala: There’s a huge misconception out there, Joe, about willing property to your heirs. If I own a piece of property and I pass away, and I have a will that says “I’m gonna give all my stuff to my kids” and the property remains in my name, and I pass away and the kids say “Great, I own the property”, they actually don’t. Depending on the state, there’s a huge legal component to this.

The kids learn this eventually, because maybe a potential buyer before us gets in there and they say “You know what – there’s nothing we can do on this without legal action.” So we get a lot of calls like that… And we can undo and solve a lot of those problems. Over the years we’ve become experts at that.

Joe Fairless: And how do you solve that?

Jack Butala: It’s very, very, very geographically specific. In California it tends to be a lot easier than certain states. You need a death certificate and an affidavit and you can go through it. And most title agents can do it – or will do it – for you.

In Arizona it takes a probate action. It’s almost prohibitive. You have to almost do a quiet title action to undo it. So consequently, if you go to Arizona, there’s a lot of back-tax property there, which is a whole different animal, because people just aren’t willing to go spend 2k-3k to get an asset that’s worth 2k-3k in their name. So it’s really geographically specific.

Joe Fairless: Got it. Taking a step back, based on y’all’s experience, what is your best real estate investing advice ever for investors?

Jack Butala: Go ahead, Jill.

Jill DeWit: I have to think about it… My best real estate investing advice? Learn how to use data to do the heavy-lifting, which is everything that Steven has taught me… And then everything works out. We joke about “Money solves all problems.” Man, when you buy an asset, use data, so you don’t have to do a lot of work. Smoke out the great deals, buy something really cheap. You can market it all wrong, and do very well.

Jack Butala: We just did a podcast with this title, and I answered this exact question… I like to say it like this – good acquisitions solve all problems.

Jill DeWit: Yup.

Joe Fairless: Right. It makes sense.

Jill DeWit: [unintelligible [00:16:15].29] Even though I’m the sales part of the team and I really love being in charge of all that, I get excited on the buy side. And now one of the roles that I’ve taken on is we do deal-funding for our Land Academy and House Academy members, and it kind of rolls through me… And I approve the transactions and fund the deals. And I just get excited on the buy side, because we know how it’s gonna go; you know when you bought it, “Wow, this is a home run. Quickly, let’s close this deal. We’ve gotta own this” kind of thing, and it’s the greatest.

Joe Fairless: We’re gonna do a lightning round. Are you two ready for the Best Ever Lightning Round?

Jack Butala: The best book I’ve ever read is not a real estate book at all, it’s called Showing Up For Life. It was written by Bill Gates Sr. The Bill Gates that we know – his father.

Joe Fairless: Got it.

Jill DeWit: Wayne Dyer.

Joe Fairless: Oh, yes.

Jill DeWit: Everything Wayne Dyer. I have him around the house all the time.

Joe Fairless: Noted. What’s a mistake you’ve made on a transaction?

Jack Butala: The biggest mistake I’ve made – and this isn’t transaction-specific – is not believing in marketing, specifically internet marketing, and I got my butt handed to me around 2009 because of that. It had almost sunk the ship, but luckily we cured our ways.

Joe Fairless: And will you elaborate a little bit more on that?

Jack Butala: I had a single marketing channel. We were selling a tremendous amount of property on eBay. We were doing about 30 transactions a day on eBay, and the bottom fell out of that market and it was a classic example of a single point of failure/all your eggs in one basket… And all we had to do was just plan for a downturn and have a bunch of — now we probably have 20-30 channels of marketing through social media, on our websites, and a network of buyers, and a massive email list, and all of that.

My advice to somebody who’s brand new is to really develop those networks and start now.

Joe Fairless: What’s the best ever deal you’ve done?

Jack Butala: The best deal I ever did was a deal early on where I purchased a ton of property right at the Grand Canyon, for a very small amount of money, and resold it about six months later, and we netted over – this was really early in my career – almost $900,000.

Joe Fairless: Best ever way you like to give back to the community?

Jill DeWit: Land Academy.

Jack Butala: Yeah, we started a whole company… Jill, go ahead.

Jill DeWit: We’ve spent the last couple of years really growing, and even put our own acquisitions and things on hold a bit, to really give back and help the planet. We have hundreds of members now, several that we know, that are making more money than us every month, and that’s the greatest feeling ever. We have taught them everything that we do, and they are killing it.

Joe Fairless: And how can the Best Ever listeners learn more about what you all are doing?

Jill DeWit: Buwit.com shows all of our companies – Land Academy, House Academy, the direct mail company, how to get data, our online communities… Tons of free stuff. Or just go to LandAcademy or HouseAcademy, our podcast, and videos on YouTube, and all kinds of good stuff.

Joe Fairless: Awesome. Well, you two, thank you so much for being on the show, talking about your business model, what works, what doesn’t work, what you have in place now to make sure you’re set up, so that if one marketing channel does not go according to plan, then you’ve got many others that can pick up the slack… And also, just the overall approach for how you’re finding sellers and how you think about making offers and the type of offers that you make.

I appreciate you two being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Gary had multiple businesses before getting into real estate investing. Once he started with real estate investing he knew that he wanted to syndicate apartment communities and found a way to start doing that. Now, 1500 units later he’s on the show to tell us how he’s scaled to the level that he has. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“We had closed two deals with that broker before, so that helped” – Gary Lipsky

Theo Hicks: Thanks for joining us. I’m looking for the conversation and talking about what you’ve got going on in your real estate business. A little bit about Gary’s background – he is the founder and president of Break of Day Capital, syndicates B and C class value-add apartment opportunities in high population growth areas. I’m looking forward to learning more about that investment strategy.

He is both a passive and active investor, owning over 1,500 units. Based out of Los Angeles, and you can say hi to him at BreakOfDayCapital.com. Gary, before we dive into the meat of the conversation, can you tell us a little bit more about your background and what you’re focused on now?

Gary Lipsky: Yeah, I’ve always been an entrepreneur my whole life. I was shoveling driveways, and [unintelligible [00:02:19].20] growing up in New Jersey. I owned a restaurant delivery service in college, and co-produced three independent films in my twenties. I started an after-school business in Los Angeles and we served over 9,000 students daily… But I always knew real estate was going to get me to where I wanted to be. When I looked around, the wealthy people either had their own businesses, or owned real estate, and usually both.

So when I even bought my first residence, I always was looking for value-add opportunities, and I kept finding houses that I can add value to, and upgrading and moving into a nicer community for my kids. And I took advantage of the tax benefits, and then was able to leverage that and turn it into some single-family rentals, and passively investing into real estate. Now, like you said, I own over 1,500 units, and now I’ve gotten into real estate full-time a little over 2,5 years ago.

Theo Hicks: Of those over 1,500 units, what percentage are you a passive investor and what percentage have you syndicated yourself?

Gary Lipsky: Passively I would say about 90%. I have a 76-unit deal that I was a key principal on in Crowley, Texas, and a 42-unit in Tucson, and I most recently signed an LOI for a 128-unit in Phoenix that I’m working on.

Theo Hicks: So the 76, 42 and 128 – those are your active deals.

Gary Lipsky: Yeah.

Theo Hicks: Okay. Let’s now talk about passive investing first, and then we can dive into the active investing. A pretty common question that I see a lot is how do you — not find a syndicator, because it’s pretty easy to find a syndicator to invest with these days, but what’s your process for vetting a syndicator? What would your advice be to someone who is doing their first deal? There’s hundreds and hundreds of syndicators out there these days, so what are some things they should be looking at?

Gary Lipsky: It does get overwhelming in the beginning, because you just don’t know what to look for. I would look at a lot of deals, and learn from the different perspectives to see how are people underwriting, get to know the sponsor… I have some friends that even go out – they’ve driven across country to meet with all the different sponsors to vet them before investing… Which I love. I did not do that, but that’s one strategy.

So once you start looking at a few different properties in the same area, you can start seeing the differences, and seeing what reversion cap rate they’re using, how they’re doing the value-add, does it make sense, do the comps support it…? So you start getting a feel; the more deals you see, the better acclimated you get.

Theo Hicks: So those are some things to actually look for that they’re doing, in order to pick them; so make sure they’re doing things properly. Are there any red flags you can think of, where if you’re talking to a syndicator and they say something, or you see something, and you’re automatically like “Whoa, whoa, whoa… Something is amiss here. I’m definitely not investing with this person.”

Gary Lipsky: Yeah, it’s surprising how many sponsors are wary of answering questions, or don’t answer it in a way that — it’s okay if you don’t know the answer; just get back to me and give me the right response… Versus just saying something where you don’t know the right answer, or if they start backing away from the question… When you converse with a sponsor, you start getting a feel “Do I trust them or not?” That could be a red flag, if you don’t feel like they’re being completely honest.

Theo Hicks: Yeah, I actually talked to a passive investor, and he would purposefully ask questions that he knew the answers to, but he just wanted to see how they would reply to it, just to see if they would say “Hey, I don’t know the answer to this, but I’ll get back to you”, or they’ll start BS-ing a response… So that’s definitely a red flag.

And again, I’m not sure if you’ve ever invested with someone where it’s their first deal, but I guess the question is would you ever invest with someone who has not raised capital before, or would you only invest with someone who’s done 10, 20 syndicated deals already? So I guess the question is if I’m a syndicator, I’ve maybe done a few multifamily deals on my own, what would be something I would have to do in order to have you invest in my first syndication deal? Or is there nothing I could do?

Gary Lipsky: Well, that’s the exact experience that I had to go through as a first-time syndicator. So what I’m looking for with a syndicator who might not have done any deals before is had they run businesses before? Because if they have, then they can use that experience to translate into real estate, particularly multifamily. The way you’re running a business, you’re building teams, how you communicate with people, how you follow up and hold people accountable – those are all experiences that you can take from previous businesses, and that’s what I used when I started out.

Theo Hicks: Okay, let’s transition into talking about your first syndication deal – a 76-unit, a 42-unit… Do you wanna tell us a little bit about some of the steps you had to take before you started finding those deals? Any team members you had to find? Did you find the capital first, verbal commitment-wise? Did you have financing lined up from a bank? What are some of the things you did before you actually went out and found your first deal? Or did you just find your first deal and then figure all that stuff out later?

Gary Lipsky: I was looking at smaller deals in the beginning, and realized I needed to go bigger, and with a team. So the 76-unit I was a key principal on… So I signed on the loan, I invested some money, and I was able to learn from sponsors. They kind of walked me through everything, and be a part of the process. So that was a really good education for me.

Then on the 42-unit – that’s when I’m raising money, my business partner found the deal, we constantly underwrote it, checked the comps, kept evaluating it, and felt strongly enough by having had that other person to bounce back the ideas… It was really important to have that level of confidence. Doing it on your own, particularly in the beginning – you think it’s a good deal, but being able to run it by someone and going through the process really helps have that confidence level up, and… Hey, you’re not crazy, you’re not doing anything foolish.

Theo Hicks: Yeah, exactly. So with that 76-unit you were on the GP because you were the loan guarantor, you invested some capital, and I’m sure you learned a ton from that process.

Gary Lipsky: Yeah.

Theo Hicks: A lot of people might not have the net worth liquidity in order to do that… But on the second deal you were able to raise capital. You mentioned you had a business partner, so I’ll ask you about that in a second, but how much money did you have to raise for that deal, and how did you raise that capital? Who was it from, how did you position the deal to them, it being your first time raising capital?

Gary Lipsky: Yeah, we raised just over a million dollars, and it was friends and family, people that I had done business with previously and trusted me, knowing that I had been successful before… but yeah, it’s not an easy process your first time. But what you’re doing is sharing an opportunity and something that you really believe in, and people buy into that opportunity. When they look at other places where they’re gonna put their money and they see that this is a great opportunity, with amazing tax benefits, they were excited to be a part of it.

Theo Hicks: And you mentioned the benefit of a partner… Obviously, it is possible to do a syndication deal by yourself, but you need to make sure you know how to do everything, and most people don’t know how to do everything… From what I’ve seen, you’ve got kind of like the numbers guy, and then the networking guy. So someone focused on the relationships, raising capital, and the other person is at their computer, crunching numbers and underwriting the deals, and maybe asset-managing it… What advice do you have a) on finding a partner, and b) on vetting that partner?

Gary Lipsky: It’s spending time with them and seeing if they have the same values as you. Do you trust them, how they look at deals? It’s a process that you build over time. The guy I’m partnering with – we kept running into each other at meetups, so… Developing a rapport over time, and we were both interested in a property together, so we went out there together and looked at it… And over time, it was clicking.

I appreciated how hard he worked, and I can rely on him, and that was really important to me… And obviously, he felt the same way about me.

Theo Hicks: How did you find the 42-unit deal and how did you find the deal you’re currently working on, that 128-unit deal?

Gary Lipsky: The 42-unit deal – my business partner was already out there in Tucson, and — it hadn’t even come on the market yet. He was the first one to see it, so that’s how we actually got it. It’s certainly not the sexiest-looking building, but tremendous value-add opportunity… And it’s in that 42 range, which is maybe a little bit bigger than some of the small players, and smaller than some of the bigger players. So it’s that middle ground, which was nice.

But the 128-unit… One of the guys that came in on our 42-unit deal – he works full-time, but he got this deal because he had done business with the broker previously. He sent it to my business partner, and I got a text at like [12:30] in the day, he’s like “We’re going to Phoenix tomorrow, 3 AM. I’ll talk to you later.”

So this deal was going to market, and we wanted to be the first ones to see this. So we drove out from L.A, 3 AM, and checked out the comps, walked every inch of this property… I was underwriting the deal on the computer the whole way back, and five hours back to L.A, and just going through every single scenario. We thought this was a great opportunity, so… We got it by outhustling others, and being one of the first to see it. We didn’t get into a bidding war. We aggressively went after this property, trying to avoid best and final… Because I’ve been in best and final a number of times and have lost, and I thought this was a really good opportunity, and if we could take it down right from the beginning, then let’s try to do that.

Theo Hicks: So both those deals were off market. The second, that 128-unit, was — you said it was someone who invested in the first deal knew the broker, and then sent you that opportunity, and then you were able to get it before it went to market, right?

Gary Lipsky: Yeah, he had actually closed two deals with that broker before, so he had a relationship with him. That’s important. Even after doing one deal, we’re just getting a lot more attention from brokers… So that’s how — it starts snowballing really fast, so it’s been really nice.

Theo Hicks: Yeah. And that 42-unit – that was off market through your business partner; was that also through a broker relationship?

Gary Lipsky: No. Certainly, he’s looked at properties with the broker before, but he really didn’t have that strong of a relationship. It was right time, right place, so we were able to grab it.

Gary Lipsky: I would say outhustle and be creative on solutions. It’s worked for me in all of my businesses in the past, and it’s worked in real estate as well.

Theo Hicks: Do you wanna give us an example of a creative solution? Maybe not real estate-related, but on one of your businesses? If you can think of anything — you said you made some films; that’s pretty interesting… What are some creative solutions you had for that? I’m sure that was–

Gary Lipsky: Sorry, for what?

Theo Hicks: You said you created films when you were in college, is that right?

Gary Lipsky: Oh yeah, in my twenties. Well, the company that was handling one of my foreign distribution sales – they were going under. We had a deal with Germany for 50k for the rights for the film, and I said “Give me the number of the person and I’ll get the money myself.” And I would wake up, 4 AM, and just call every single morning for like two months, and I got fully paid. And most people were like “Germany never pays, or they give you a discount…”, and I got the full amount after two months, just calling myself.

Theo Hicks: Yeah, that’s definitely hustling right there.

Gary Lipsky: Yeah.

Theo Hicks: Alright, Gary, are you ready for the best ever lightning round?

Gary Lipsky: Yeah, let’s do it.

Theo Hicks: Alright. First, a quick word from our Best Ever sponsor.

Break:[00:13:31].16] to [00:14:09].24]

Theo Hicks: Alright, what’s the best ever book you’ve recently read?

Gary Lipsky: Millionaire Fastlane, by M. J. DeMarco.

Theo Hicks: If your business were to collapse today, what would you do next?

Gary Lipsky: Well, I would reflect and learn from what went wrong, and get back right at it again.

Gary Lipsky: I’d have to say my personal residence right now. I bought it, and I knew it was a great value-add opportunity, and fixed it up, and within a couple of months the value went up a quarter million dollars.

Theo Hicks: What about your worst deal?

Gary Lipsky: It had to be a student housing. We bought this as a passive investor, and they just built up too much student housing in that area, so now we’re struggling over there.

Theo Hicks: What is the best ever way you like to give back?

Gary Lipsky: I’ve founded CORE Educational Services. It was in 2006… So we service under-served youth in L.A. We’ve had a tremendous impact over the last 13+ years.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Gary Lipsky: You can reach me at Gary@breakofdaycapital.com, or visit my website as well.

Theo Hicks: Alright, Gary. I really appreciate it. Very insightful conversation we had today. Just to summarize what we talked about so far – we talked about first your passive investing, and we discussed some of the things to look for when you’re vetting a syndicator, or just how to become a passive investor in general. You talked about how you just looked at a ton of deals, underwrote them, just to see the different ways different sponsors underwrite deals, look at deals, revenue cap rates, how they’re adding value, how they’re finding their comps, if their comps make sense… You mentioned that you had a buddy who literally drove across the country to meet all these people, so that’s definitely one strategy that will definitely work.

Then some of the red flags – we talked about [unintelligible [00:15:55].05] So if you ask them a question and they either refuse to answer it, or they do answer it and you can obviously tell they’re making up an answer on the fly, what you wanna see is obviously that they’re knowing the answer, but if they don’t, at least saying “You know what, I’m not sure about the answer to that question, but I’m gonna go look it up and I’ll get back to you within a few hours”, or something like that… And just kind of trust your gut. And if you feel like someone is not trustworthy, that’s definitely a red flag.

Then we transitioned into talking about active investing, and you provided some solid advice about how someone who has never syndicated a deal before can attract capital from friends and family… And you mentioned you need to focus on what you have done in the past. So if you’ve done real estate deals, focus on that. If you’ve started businesses before, focus on that, and in particular focus on the skills that you’ve learned from those experiences and how that will help you conserve and obviously make them money.

We also talked about how you’ve found your business partner, and some tips on forming syndication partnerships on the GP side, so finding a GP to work with. It really comes down to spending time with them, [unintelligible [00:16:56].24] and making sure that your values and your core missions are aligned, and again, going back to that trust factor.

Then you mentioned that you actually met your business partner at a meetup group, which is pretty cool. Then you mentioned, lastly, about finding deals. Your first 42-unit was kind of a right time/right place deal, but you talked about on the 128-unit how you’ve found it through hustling. So your business partner said “Hey, we’re going here tomorrow. I’ll see you at 3 AM”, you drove there at 3 AM, you visited the comps, you drove the property, and on the way back, that five-hour drive, you underwrote the entire time, and you were able to get your offer in before you had to go to that best and final seller round.

And something else interesting that you mentioned was most people want to find those off-market deals from brokers, and most brokers are gonna wanna see some sort of track record… And it seems, at least for you, one deal was enough to start getting a lot more attention from brokers, and seeing more off market deals. I’m sure a lot of people who are listening – that’s something they’d like to hear; just do one deal, and then you can have the chance of getting those off-market opportunities.

Then lastly, your best ever advice, which kind of summarizes everything you’ve talked about, which is hustle and be creative about your solutions, and there were plenty of examples of that throughout the conversation.

I appreciate it, Gary. Again, you guys can say hi to him at BreakOfDayCapital.com, and he also provided his email address. Thanks for joining us today. Have a best ever day, and we’ll talk to you soon.

Joe and Yusef will dive into a recent 172 unit deal that Yusef closed on and is adding value to. We’ll hear the numbers as well as Yusef’s partnership structure and how he’s scaled from single family homes to buying apartment communities. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“If you stay disciplined in your fundamentals, that usually creates longevity for the experienced investor” – Yusef Alexander

Yusef Alexander Real Estate Background:

Co-founder, VP, and Business Development Officer at Real Estate Asset Partners (REAP)

He has over 20 years of experience, repositioning commercial and residential properties

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Yusef Alexander. How are you doing, Yusef?

Yusef Alexander: Hey, Joe. I’m doing great!

Joe Fairless: Well, I’m glad to hear that, and looking forward to our conversation. A little bit about Yusef – he’s the co-founder, vice-president and business development officer at Real Estate Asset Partners. He has over 20 years experience repositioning commercial and residential properties. Based in Los Angeles, California. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Yusef Alexander: Background – I’m an old guy, I started in the mid to late ’90s, buying and selling homes in the blighted areas of Los Angeles. I went through both economic swings in the mid-90’s and 2000’s. I bought and sold high-end and small, distressed properties from Bel Air to Compton, and everywhere in between. So what I did was I created a resource of investors. From that activity I moved to multifamily, and now my focus is multifamily assets in South-East, North Carolina and mainly Georgia.

Joe Fairless: Okay, got it. So you are buying apartment communities in the South-East.

Yusef Alexander: Yes.

Joe Fairless: What have you bought recently?

Yusef Alexander: A 172-unit building in North-West Atlanta. It’s just an emerging area — well, it’s not emerging anymore, it’s just an established area… And in a — not a renaissance, but the working class population there has now become the upper-middle class.

Joe Fairless: Okay. How long ago did you close on it?

Yusef Alexander: Probably 7-8 months now.

Joe Fairless: Okay. Belated congratulations on the close… Let’s talk about some specifics of the deal. What was the purchase price?

Yusef Alexander: I put two million down, purchased it for eight million.

Joe Fairless: Okay, and what’s the business plan?

Yusef Alexander: The business plan is to — actually, a tiered approach. I wanna keep some of the population in the surrounding areas there, so I’m gonna do a tiered approach by having a light rehab, and then I’m gonna have a very high-end rehab. So I’m gonna offer apartment homes, pretty much, luxury apartment homes, and I’m gonna reposition it for low twenties as far as the price; twenty million or so. I’ll refinance it, and get on to the next project.

Joe Fairless: Okay, so you’re doing a light rehab, and then you’re also doing a high-end rehab. What percent of the 172 units are light rehab?

Yusef Alexander: Light rehab probably 5% to 10%.

Joe Fairless: Okay. And then the high-end rehab the rest?

Yusef Alexander: Yes.

Joe Fairless: Okay. And how do you determine that percent breakdown?

Yusef Alexander: Well, the building was owned with a previous partnership, so I have a lot of historical experience with that area and with the occupants. So studying the activity and know what the population is, and how the pulse of the market as far as the population in the area is, I’ve determined that I wanna keep some of the — I don’t wanna say lower-end… I just wanna keep some of the lower price points available for some of my occupants.

Joe Fairless: And will you repeat the partnership thing, so I’m understanding it correctly?

Yusef Alexander: I was a smaller partnership, meaning a 12% partnership, and now I’m a 100% owner with my new partner; we’re 50/50 partners.

Joe Fairless: Okay, so you had 12% ownership of the property, and then you and another partner bought out all those other partners?

Yusef Alexander: Yes, on a purchase.

Joe Fairless: Okay, on a purchase. So now you and the other partner are the ones that own this building together. Is that 50/50, or another breakdown?

Yusef Alexander: Yes.

Joe Fairless: In that structure, who brings what to the transaction?

Yusef Alexander: Well, we bring 50% of the equity, we bring 50% of the partnership, and we split it down the middle.

Joe Fairless: So you both tackle things together and it’s all 50% of the money, 50% of asset management… It’s all split down the middle.

Yusef Alexander: Yes. You know, with an asset there’s asset management, there’s leasing, there’s construction, there’s design, there’s a lot of activity and expertise that needs to happen, and however you align it – if you third-party it or if you do it in-house – then there’s fees and partnerships that can be split… Sponsorships, general partnerships that can be split. We can get into that, but it just depends on how you guys take it down, how the group takes it down.

Joe Fairless: Yeah, let’s get into it a little bit, just in terms of what you’re focused on for the property, and then what your partner is focused on to oversee the project.

Yusef Alexander: My focus is going to be stabilization. There’s a de-leasing situation that happens, because some of the units – or most of the units – are not gonna be occupied while the renovations are happening… So you de-lease it and you have to monitor the de-leasing as that happens, which I’m gonna be in charge of, and then once the rehab happens or the business plan is executed, then we’re gonna make sure we optimize the occupants and the leasing to that new product that’s being offered. It’s pretty hands-on, it’s pretty important; you’ve gotta be on top of everything.

And then there’s the construction management. The construction management has to do with the design, the execution of… Let’s see – we’re doing 3 million dollars of rehab, a certain amount a door, and that has a whole process to it as well.

Joe Fairless: With being on top of everything, what are some specific examples that if a Best Ever listener is undertaking a project like this and they hear that they’ve gotta be on top of everything, what are some things that you’d want to tell them “Hey, you’ve really gotta pay attention to this stuff.”

Yusef Alexander: Well, if I just talk specifically about leasing – you wanna be very granular about what the market commands, the amount. So if your project is — let’s just use $1,000 as a round number. So your stable project is gonna offer a $1,000 rent for two bedrooms, and the next door they’re offering some of the same amenities or more and their price is higher or lower – you need to put an application in next door, you need to drive comparable rents, you need to walk comparable properties and figure out the rental experience of that product that is competitive to yours, because you’re putting all of your focus and all of your resources into delivering a product at a certain price point, and that price point has to prove out over 200 units.

Once that price proves out over 200 units financially, and then your lending, and your investors, and things like that – all it takes into account. So if I’m talking to someone and saying “Be on top of everything”, be on top of the rental rates, the product, the comparables in your area.

Joe Fairless: And then on the construction management side, when you say “design”, are you working with a design firm, or what are you referring to with that?

Yusef Alexander: As far as the construction side – again, there are some very specific areas that need to happen on that side, but yes, you need an architect, you need a design. This is only dictated by the level of construction that you are undertaking. If you’re making a new leasing center, that might not be that much design-heavy. But if you’re doing a pool, and a bungalow, and a landscaped DG area for pets and families, you’ve gotta get in there and make sure it’s done right.

Joe Fairless: DG?

Yusef Alexander: DG is the dirt or the landscape kind of pathways that are in a lot of hardscapes now. I just use it because we use it so much… I think the name of it is disintegrated earth, or something like that. It’s just pretty dirt. You’ll see it.

Joe Fairless: I like that, “pretty dirt.” [laughs]

Yusef Alexander: When you go outside and you see those landscape [unintelligible [00:09:42].26] you see dogs and people walking on them, you’re gonna be like “Oh yeah, Yusef was talking about that.”

Joe Fairless: [laughs] So with this project you have one business partner. Was the other business partner in the deal before this as well?

Yusef Alexander: They were in the asset, and then the other business partner wanted to move in a different direction with their portfolio.

Joe Fairless: Okay, so there were only three people previously, and now there are two.

Yusef Alexander: Yes.

Joe Fairless: Cool. How does that work, when you’re three owners in a deal, and one wants out, two wanna stay in… What do you do?

Yusef Alexander: Well, if you are in a situation where the business owners are all kind of in the industry or in the same ilk of how they conduct business in this space, specifically multifamily, then usually it’s just a price; you come up with a price and you pay out an owner.

Now, I don’t know how many partnerships you’ve been in, Joe, but people are people. Sometimes there’s different seasons of life, there’s different issues… Who knows how a partnership would move into an equitable space if someone wanted to move out. There’s an infinite number of examples to that effect happening.

Joe Fairless: In your case it just had a price… So how did you value the price of their ownership?

Yusef Alexander: The price of their ownership comes from the price of the asset. The price of the asset is determined by the agreeable third party, and then that is split from the percentage of the partnership.

Joe Fairless: And then what type of third-party do you hire to do that valuation?

Yusef Alexander: You can do a broker’s opinion of value, you can do an appraisal, you can do kind of a desktop appraisal from a lender… There’s a number of ways you can get a third-party valuation for an asset.

Joe Fairless: Which one did you do?

Yusef Alexander: Broker’s opinion of value and a desktop appraisal.

Joe Fairless: And will you define a desktop appraisal again?

Yusef Alexander: A desktop appraisal for me is some type of financial group that loans money and they underwrite deals to make sure they position correctly in the money that they lend. So they do appraisals and valuations – that’s kind of what they do.

Joe Fairless: And did you all agree prior to getting the broker’s opinion of value and the desktop appraisal on who would be doing those?

Yusef Alexander: Yeah. Again, if I’m buying units in Georgia, I don’t want a broker’s opinion of value from a group in Hawaii.

Joe Fairless: Right. So you all identified “Here’s a broker we’re gonna get an opinion of value from. Here’s the lender that we’re gonna get a desktop appraisal from, and then we’re going to average those two and then come up with a valuation”?

Yusef Alexander: No, that’s a pragmatic way of doing it… It depends. If the numbers are the same or agreeable, then we just kind of use that metric – averaging them out, or using the one that’s most trusted… Or maybe even using the higher one, if you wanna get this done, and whatever is agreed upon in the partnership.

Joe Fairless: And what did you all do?

Yusef Alexander: We did the higher one.

Joe Fairless: You did the higher one, okay. And I imagine the higher one was the broker’s opinion of value, yes?

Yusef Alexander: Yes.

Joe Fairless: [laughs]

Yusef Alexander: Their motivation is what it is.

Joe Fairless: Right, right. That’s interesting. So that was your most recent purchase… And is that the largest property you have in your portfolio currently?

Yusef Alexander: No.

Joe Fairless: What is the largest one?

Yusef Alexander: The largest one is a 355-unit in Georgia.

Joe Fairless: In Georgia… Staying in Georgia.

Yusef Alexander: Yeah, there’s some opportunities here… But there’s opportunities in other markets as well; it’s just that one came up.

Joe Fairless: When did you buy the 355-unit?

Yusef Alexander: This one was purchased maybe five years ago. I’m a minority partner in that.

Joe Fairless: Okay. So you’re a passive investor in that one?

Yusef Alexander: Yes.

Joe Fairless: Okay, cool. It’d be interesting to touch on briefly then… So you’re an LP in that one… How many deals are you an LP in, approximately?

Yusef Alexander: Let’s say five.

Joe Fairless: Okay. And then how many are you a GP in?

Yusef Alexander: Two.

Joe Fairless: Two. So with the 172-unit you’re clearly a general partner; with the 355-unit you’re an LP… What things – if any – did you learn from being an LP in the 355-unit, that you apply to the 172-unit.

Yusef Alexander: Well, again, I’m a deal junkie, and I like to get deals done, and sometimes the way to insert myself in a deal to leverage my capital, or to leverage my knowledge – my participation is determined by that. So the LP deals – I could have been a general partner, but the sponsorship was already established: who’s gonna reposition the asset, what the business plan is gonna be, and the management of the asset. That was already established. The limited partner was available; they were raising – I forget; maybe 3-4 million dollars – and I was able to insert myself and leverage the capital.

So I’m always learning in deals. I’m a deal junkie… Not a deal junkie — I like to look at deals, but I also like to participate in deals that are in alignment with my business goals and my experience and my career.

Joe Fairless: Okay. So what did you learn from being an LP in that deal, if anything, that you apply to actively managing the 172-unit?

Yusef Alexander: It’s not really a cross-over. I’m trying to put both hats on. If I didn’t know about the risk factors are the experience and the duration of taking an asset from acquisition to disposition – if I didn’t know that as a general partner, would I have invested in that as an LP? No, I probably wouldn’t. So by being a general partner, it allows me to have comfort in being a limited partner.

Joe Fairless: But weren’t you a limited partner before general partner, right? Or am I missing something…?

Yusef Alexander: No, I bought assets as a general partner throughout my career.

Joe Fairless: Oh, got it.

Yusef Alexander: This is the current activity now…

Joe Fairless: The current portfolio. I’m with you. Yeah, alright.

Yusef Alexander: We can go back and talk about deals…

Joe Fairless: Yeah, okay. Got it. Fair enough. With the other property that you’re currently a GP on, which one is that?

Yusef Alexander: The 172 units.

Joe Fairless: Right, one is a 172-unit, but I thought you mentioned you’re a general partner on two deals.

Yusef Alexander: That one is 190 units. 193… I think we captured a couple of the units… 193, let me just say that.

Joe Fairless: Got it. And where is that?

Yusef Alexander: It’s in Georgia as well.

Joe Fairless: In Georgia. I’m noticing a trend. And what was the business plan and how long did you own it?

Yusef Alexander: The business plan was to buy it, do a value-add on it, take the asset, and actually change the class of the asset. The asset was probably a C asset in a B area. So it was an average asset in a very nice area, or nicer area… And then to change the class with the accommodating amenities to a nicer area, what the area would want.

Yusef Alexander: The best real estate advice ever is — would it be to a beginning investor, or…?

Joe Fairless: Sure.

Yusef Alexander: Well, what I would tell a beginning investor is surround yourself with the right people, and experience. Get out there and have some real estate experience. I could drill into those if you like…

Joe Fairless: What about a more experienced investor? What’s something you would tell them?

Yusef Alexander: Be disciplined, stay disciplined. Because what happens with the experienced investors, which I’ve known and I’ve made this mistake as well – the market is very influential. There’s a lot of things happening in the market with interest rates. There’s a lot of things happening in the market with the movement of activity to different areas. This is a hot area, this is an emerging area. But if you stay disciplined in your fundamentals of why you buy property, what you’re looking for when you buy that property, and also what your plan is for exit – having multiple exits versus one or two exits – staying disciplined in that usually creates longevity for an experienced investor.

Joe Fairless: I like it. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Yusef Alexander: We’ll see. Let’s do it!

Joe Fairless: I think you’re ready. First though, a quick word from our Best Ever partners.

Break:[00:18:22].23] to [00:19:07].14]

Joe Fairless: Alright, Yusef, best ever book you’ve recently read?

Yusef Alexander: I like The Daily Stoic, Ryan Holiday.

Joe Fairless: Okay. Tim Ferriss talks about that a lot.

Yusef Alexander: Yeah. Pretty cool.

Joe Fairless: Best ever deal you’ve done?

Yusef Alexander: I was the second investor on a condo conversion. It pretty much quadrupled the returns. I bought in it for a million, sold it for over four million.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Yusef Alexander: Early in my career, 20-something years ago, I bought a home next to a gas station. [laughs] That was a mistake.

Joe Fairless: And that’s because of the loitering, or the environmental issues?

Yusef Alexander: You could stack 20 different reasons why. Looking back, with 20 years of experience – I never should have bought that. But anyway. I learned a lot.

Joe Fairless: Did I get the two big ones, loitering and environmental issues? Or is there something else?

Yusef Alexander: Yes – loitering, environmental issues, smell, noise… Usually the lighting on a commercial gas station has these lights that are like baseball stadium lights. So no matter what time at night it is, you have these — anyway, it was a mistake.

Joe Fairless: Note to self, never buy a property to live in next to a gas station, too.

Yusef Alexander: [laughs]

Joe Fairless: Best ever way you like to give back to the community?

Yusef Alexander: I’m a literacy advocate, so I like to give back through championing literacy projects, childhood literacy, emotional literacy and financial literacy.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Yusef Alexander: LiteracyUp.com is a website that we launched to help close the world gap with childhood literacy. My company’s site, Real Estate Asset Partners, or www.reap.capital, and I’m online, you can easily find me.

Joe Fairless: Okay, and we will include that in the show notes. Yusef, thank you for being on the show, talking about the 172-unit you’ve got in North-West Atlanta, the areas of focus, and how you structured that… And then with that transaction, how you structured the exiting of one partner, more so so that as Best Ever listeners we can know what to do if we are in a partnership and things need to go a different direction, how to do it fairly so that everyone is more or less happy with the outcome, as well as talking about different lessons you’ve learned from the other projects you’ve worked on.

Thank you for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Ben sold over $2 Billion in real estate in his first year. We’ll hear some of his best ways he generates leads for high end homes, as well as hear about his app Rila and how that is helping people with their properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Save your cash” – Ben Bacal

Ben Bacal Real Estate Background:

Real estate agent and co-founder of Rila, a mobile app designed to provide the community with free, unencumbered access to real estate and industry professionals

Has sold more than $2 billion in real estate

One of his most notable transactions includes 1181 Hillcrest—the largest sale ever recorded in Beverly Hills at $70,000,000

Based in LA, CA

Say hi to him at Rila in the app store or @benbacalestates on instagram

Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

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Theo Hicks: Absolutely, and I appreciate you taking the time to speak with us today and provide us with your real estate advice. A little bit about Ben – he is a real estate agent and co-founder of Rila, which is a mobile app designed to provide the community with free, unencumbered access to real estate industry professionals.

He has sold more than two billion (with a b) in real estate. One of his most notable transactions includes 1181 Hillcrest, which is the largest sale ever recorded in Beverly Hills’ history, at 70 million dollars. He’s based out of Los Angeles, California, and you can say hi to him by downloading his app, Rila, in the app store.

Ben, before we dive into the meat of the conversation, can you tell us a little bit more about your background and what you’re focused on now?

Ben Bacal: Sure. My focus is twofold. I am a luxury agent, and I cater to those buyers that really don’t need these expensive homes, but they just wanna keep on stepping it up… So I’m doing a deal right now on the beach for 26 million dollars; it’s a beautiful beach house. I have a house in the Hollywood Hills for 30 million; the designer did all the James Perse stores across America. I’m working on another property in the Hollywood Hills for 40 million, by a designer SAOTA Design Group. He’s an architect out of South Africa… And hopefully, I’m about to work on some really big deal for 100 million. But my bread and butter every day is deals between half a million up to five million, and I do about 7-8 million dollars a month in those transactions.

My focus these days is helping my teammates learn the ropes and get out there and get leads. That’s my focus, to help them get leads.

Theo Hicks: Alright, so for those of us that aren’t too familiar with these size deals – I’m assuming we’re talking about residential here – let’s start high-level. How are you generating these leads? For example, your 26 million dollar beach deal, these deals in the Hollywood Hills – how are these sellers finding you?

Ben Bacal: Well, it’s been a long process, but I guess I can dial it back from day one. When I first sold my first luxury home for 3 million dollars, I let everybody know up and down that street that I accomplished that sale. I let them know door-knocking, telling them face-to-face, I let them know with a postcard, I cold-called, I sent out a video on YouTube, I did an e-blast letting them know… Essentially, that’s what I did with all my sales. I leveraged the fact that I closed X, Y and Z for so-and-so money, and that enabled me to get another opportunity to list someone else’s house. That’s really the name of the game. I leveraged all the past sales that I did, and people were like “Wow, okay. I’m gonna give this guy a shot.” That’s how I got my foot in the door to get the listings.

Often the sellers say “Okay, maybe I’ll sell”, and then you have to prove to them that you’re not just all talk. So I would get a potential listing, they’d say “Yeah, I wanna sell. Bring me some buyers.” I would then go into my office at my real estate company and announced “Hey guys, I’ve got this style home, in this location. Who’s got a buyer?” And out of all the couple dozen realtors in my office, one person or two people would say “Yeah, I do.” I’d schedule a meeting and show that buyer, and that would be another meeting with that potential seller; he’d see me again, we’d build rapport with each other… And eventually, I’d say to him “Look, what if I was able to take some really cool photos with my professional camera or with my phone, and I can reach a really broader audience, and instead of just bringing one or two people, I’ll bring 10-20 people.” Because that’s what it’s gonna take. And I rinse and repeat, and lo and behold, I end up selling over two billion.

My first year of real estate I made $394,000 in commissions by using that tactic of hitting the pavement, door-knocking, meeting as many people as I can, and convincing them with a smile on my face, and ease of comfort, by just realizing that I’m not this pushy salesman, that I genuinely believe that their house is terrific, and I can connect them to a potential buyer that could pay their price.

I developed those relationships with those people, because this is all about a relationship game. If people like you, they wanna work with you, and if you can further provide a track record of success, then you’re on your way to making millions of dollars.

Theo Hicks: Yeah, thanks for walking us through that entire process, from your first deal and your thought process for how to 1) find leads, find deals that actually sell, and 2) find those buyers. On the first hand, find those leads – you mentioned some of the things that you did after you sold your first home, and one of those was a video… That’s my first time hearing about that; it’s a very interesting, unique strategy. Do you mind telling us what was all included in that first video?

Ben Bacal: Well, it was actually a WhatsApp video. I shot my camera, and then I used WhatsApp to send the video. I basically chose a dozen of my contacts – actually, a few dozen – and I essentially handpicked them, thinking that they would like this pocket listing that I’ve found, this off market deal, this property you couldn’t find anywhere else… And I sent out that video.

But I mainly did it with photos, because right now the MLS and homes.com and Zillow and Trulia – they’re all the same photos. So by just sitting at the MLS and sending content to these prospective clients of mine, I’m not providing any value. They can go on the internet and search for that. So what I did is I literally went to these properties myself and I shot a bunch of photos that they could see on the web, and I shared them on my phone. I texted them or I emailed them to everybody. Then it’s like “Oh, wow, what is this property?”

Some of the properties were actually on the MLS, but they just looked different, because they never saw the fact that it had an ocean view, or that it was beside a Freeway, or it had power lines [unintelligible [00:09:12].06] or that the backyard was actually bigger than what the photos were on the MLS. That really differentiated me, because I was providing value that no agent could find in your house, and I was getting comments on the text that say “This house is awesome, but it’s got this problem”, or “This is a deficiency”, or “This is why it’s terrific.”

That’s what I did, and it got me a lot of reactions, it got me a lot of potential clients, and people were kind of tuning in to me. But it only worked as fast as I could take photos and videos and send to people, unfortunately… But that’s why I’ve built Rila.

Theo Hicks: So you’re taking these photos and these pictures, and you’re sharing them on WhatsApp?

Ben Bacal: Or text message, or email.

Theo Hicks: Okay, so you have a list of these potential buyers. How did you create that list?

Ben Bacal: Just by meeting people. Whenever I’m out and about, whether it’s at a hotel, or if it’s waiting in line at the grocery store, or I’m about to have dinner, if I feel that there’s a potential buyer near me, I’m gonna start conversations with them. Everyone likes to talk about real estate… And I drive that conversation towards “Are you ever thinking of buying or selling a property?” and they become a potential buyer.

I also hold open houses, of course, and I get a lot of leads that way. And of course, these days I’m putting photos of properties that I visit (open houses) on my Facebook, on my Instagram, and most importantly, on Rila, so I can actually get the lead, because my phone number actually shows up that way.

Theo Hicks: Okay, so let’s dive into Rila. It’s a mobile app… Do you mind walking us through exactly what the app is, and maybe you can talk a little bit about the process of creating it, why you created it, any challenges you had creating it, things like that.

Ben Bacal: Exactly. First of all, it can be found on the App Store. It’s on iOS only. Like I said, the way I was successful as an agent when I started is I would literally go door-to-door and find these properties that weren’t for sale. And then I know where to distribute that content, tell people about it. So I’d take photos on my old Nokia phone, and eventually my older iPhone and even Blackberry – I’d take these photos and I’d start sharing them with my network. I’d be like “Look at this house I’ve found on 1221 [unintelligible [00:11:35].08] Street” and I’d share it.

Then I’d get maybe one or two texts back from the 30 texts that I sent out with that photo, with like “Oh, where is that?” But I’d send that also to realtors as well, not only to my own buyers. And then from that photo I would get a potential lead through another agent and their buyer. I’d then show up to that property, show that client the house; maybe it worked out and I got it sold, I went in escrow. Chances are it didn’t, but it got me through the door, and it showed the seller that I really [unintelligible [00:12:04].03] and I’ve got buyers.

So what Rila is is a place where you can essentially go out to any open house or any off market property and you can post that photo into an area, and buyers, if they see that photo, and that photo takes them to the listing – because it will take them to the listing – I get the lead. So literally, instead of paying for leads through Zillow, Trulia, Homes.com, all you need to do is go out to open houses, take photos, and if a buyer sees your photo and they click on it, you get the lead. It’s that easy.

So this whole project Rila is to empower agents, and go out and earn as much business as they desire. All they’ve gotta do is go out there, like I did, and shoot content, and create listings. And the more photos that they put up, the more leads they’re gonna get, and it’s all free. The idea for consumers is that, like I said before, you’re providing value, because you’re showing them photos that they can’t see anywhere else. That’s the magic, and that’s why I was so successful.

It was in Forbes a couple days ago, and the Real Deal talked about it and had an article about, saying it’s the Instagram of real estate, except the difference is instead of following people, you’re following places. Buyers are following areas of interest that they like – Connecticut, Beverly Hills, Cincinnati, Chicago, Florida, Miami Beach – and your photos that you take out there, as you’re posting them, they’re dropping in the feed, and you’re dropping like breadcrumbs of potential leads.

When I’ve got open houses now in L.A. – they’re on Tuesdays and Sundays – instead of leaving empty-handed, I’m literally going to these open houses and I’m creating listings, I’m creating all these photos you can’t find anywhere else. The idea here is to empower all the agents.

I went out there, we were literally just sitting at our desk, forwarding existing content that’s on the MLS. Bring value to all these customers out there by showing them what these properties actually look like, and your contact number is gonna be right there.

So for me, when I go get a pocket listing – how are you gonna tell people about it? You can take a couple pictures and put it in an email and blast it – sure, that could be useful… But here, you can take ten pictures, you can actually create a listing in under a minute – it literally takes like 30 seconds to create a listing – and then you always have it in your profile section; there’s a share button right on that listing, so you can share it with the world, on Facebook and Instagram and Twitter and so forth.

Theo Hicks: Is this strictly in L.A, or if I’m an agent in Cincinnati — is there a Rila in Cincinnati as well?

Ben Bacal: Yeah, when you log into the app it says you can follow three different neighborhoods – Beverly Hills, Los Angeles and West Hollywood – but you can go into your profile section and you can follow any city. We have actually thousands of users using it all over the country, and you can get to thousands of more buyers and sellers by simply creating a listing and then pressing the Share button. There’s a little arrow… And that shares directly to Facebook, and Twitter, and your email, your text…

The idea is that it’s all crowdsourced, so it’s never been done before… Where you go take a dozen pictures, and then other people will be in that open house and they’ll take photos, and it’s all gonna contribute to one listing. Then that makes your job easier. So only your name is gonna show up next to that photo to get the lead, if that makes sense.

Theo Hicks: Is this something that from a business perspective you’re trying to get a lot of potential buyers to use the app, or is your goal to focus on getting a bunch of realtors to use the app? Or both.

Ben Bacal: No, it’s both. It’s very much a consumer app, but it’s all about free leads. The whole idea here is all these MLSes and Zillows – it’s so expensive. These fees are exorbitant. Collectively, it’s costing agents millions of dollars. But why? I mean, they’re cheating.

Theo Hicks: Yeah, it’s like — you can advertise on there, and be the top of the list, things like that…

Ben Bacal: Oh, it’s so expensive. Beverly Hills is like $10,000, and the cheapest area of Los Angeles – $1,500 every month. They lock you into a six-month contract, you get maybe one good lead a month, but the rest are just spam and [unintelligible [00:16:17].11] And what’s worse is we’re uploading our content to the MLS, and they’re selling it to Zillow, they’re selling it back to us, and now they’re just trying to cut us out of the business entirely.

Theo Hicks: Yeah, exactly.

Ben Bacal: So what Rila is trying to do is put the power back into the agent’s hands, so it will never go to Zillow and Realtor.com. It’s literally going from the agent directly to the consumer, and then the consumer directly back to the agent. So we’re cutting out the MLS and the Zillows that are trying to kill our livelihood, and we’re empowering the agent to get out there and make as much money as they can just by taking photos and sharing them with their database via Rila. That’s free. All free.

I created this for myself, because I have a couple hundred listings on there, and I’m able to go into my profile and share those all day long. So instead of going home and playing Fortnite or watching my favorite TV show, I’ll go home and I’ll spend that two hours – or even an hour – and I’ll just add content to different listings that I saw, and I’ll share that.

For new agents getting in the business it’s almost impossible. I’ll tell you why… Because the top agents in all these brokerages are favorite, and they’re given the best splits, they’re given the resources to succeed. They can leverage the fact that they did all their sales, which is what I do, yes… But for a new agent, how do you get in the business? You’ve gotta spend money on Zillow, thousands of dollars… We can’t afford that; we’re just trying to get our feet wet, right? So this is what I did to start – I went out there and I hustled and I door-knocked and I cold-called, and I did the hard work, I put myself at risk and I made myself feel really uncomfortable. When you feel uncomfortable by saying [unintelligible [00:18:03].04] things happen in life; you start meeting people and connecting.

Now, if you’re not that type of person and you don’t wanna do that, and you’re going to open houses, don’t leave empty-handed. Create listings from those open houses. Literally, create a listing. You can’t do that on Instagram, it doesn’t create a listing; it doesn’t have your contact number, it doesn’t have a description, it doesn’t have a map associated to it, it doesn’t have any real estate… It’s all dogs, cats, girlfriends, girls in bikinis, guys in their underwear. It’s too everywhere. This is an app built by a realtor, for a realtor, so you can literally get out there and promote yourself via sharing content, sharing photos of homes you see. So agents are essentially helping other listing agents broadcast their listing, if that makes sense.

Theo Hicks: Yeah, 100%. Once I’m done with the interviews today I’m gonna look up in Tampa and see what properties are on there. Alright, Ben, what is your best real estate investing advice ever?

Ben Bacal: My best real estate investing advice ever is to save your cash. I think there’s great FHA loans now. You can probably get a loan and put down 10% or even 5%… So since you save up some money, go to those opportunity zones, those areas that are a little seethy, because the world’s only getting bigger… So go buy any property you can and rent that property, and you’ll see a couple years later it’s gonna go up in value, and then you’re gonna refinance that, cash out, and you’ll maybe save a little bit more cash from another sales transaction you did, and you’re gonna go buy another one. And you’re just gonna keep on doing that until you’re 60 years old, 80 years old, and you’ve got 200 of those that are just cash-flowing… It’s called champagne money.

Theo Hicks: There we go, the champagne advice. Alright, Ben, are you ready for the best ever lightning round?

Ben Bacal: Yes, lightning round. Let’s do it!

Theo Hicks: Alrighty. First, a quick word from our sponsor.

Break:[00:20:01].26] to [00:20:46].28]

Theo Hicks: Alright, Ben, best ever book you’ve recently read?

Ben Bacal: The PayPal Wars.

Theo Hicks: If your business were to collapse today, what would you do next?

Ben Bacal: I would sell shoes on the internet. Collectible shoes. I’d buy them on eBay, sell them somewhere else.

Theo Hicks: I actually used to do that in college, with Nikes.

Ben Bacal: Oh, you did? There you go… I’d sell something.

Theo Hicks: What is the worst deal you’ve ever done?

Ben Bacal: It would be — god, they’re like, every other deal. Just kidding. [laughter] The worst deal I’ve ever done… I’ve just had a bad deal two days ago. There was a homeless man sleeping in the house and I couldn’t get him out of the 50 million dollar home. He kept on messing up the deal, because was always showing up every Sunday.

Theo Hicks: That’s a unique one. And then lastly, what’s the best ever place for the Best Ever listeners to reach you?

Ben Bacal: Instagram, @benbacalestates. That works. I answer to everybody, so I’m really good at that. If anyone wants to reach out to me, it’s @benbacalestates. Check me out there. You can also see the article on Forbes about Rila, too. It really explains what we’re trying to do.Theo Hicks: Fantastic. Alright, Ben, I really appreciate the conversation with you today. Lots of solid information. Just because you’ve been selling multi-million-dollar homes doesn’t mean that you can’t apply some of these lessons to your business. Something that stood out to me that I think everyone can apply is the way you were generating leads.

You do a deal, and then you essentially let everyone know that you did that deal… And you’d use that by doing door-knocking, doing face-to-face, doing postcards, cold-calling, you make videos, you e-blast… But then the biggest thing you focused on was taking those photos that people couldn’t find on the MLS, Trulia, Homes.com, places like that, and showing those with your potential buyers or potential sellers, and that kind of helped you evolve into starting Rila, which is available on the iOS store. I’m definitely gonna check that out after this call. Essentially, agents can post pictures, and the pictures turn into listings. So it’s the Instagram of real estate, as Forbes called it, but instead of following people you are following areas.

And of course, your best ever advice, the champagne advice, which is to buy property, if you can leverage the FHA (low down payment), rent the property out, refinance, pull that cash out and do it again until you’re 60-70 years old, to have 200 properties that are cash-flowing, and making that champagne money.

Again, Ben, I really appreciate it. Best Ever listeners, thanks for tuning in, and we will talk to you soon.

Peter runs his own blog which is very popular for people who are in a similar situation to him. He shares his knowledge of putting his money to work through real estate investing, while working a ton of hours as a doctor. This episode has tons of value for other high income earners, as well as anyone who could use help with prioritizing their time between family, work, and real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“I look for other people who have invested with them” – Peter Kim

Peter Kim Real Estate Background:

Owner of the website https://passiveincomemd.com/ where he shares his knowledge of passive real estate investing with doctors and other high income professionals

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TRANSCRIPTION

Theo Hicks: Hi, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and I’ll be the host for today’s episode. Today I will be speaking with Peter Kim. Peter, how are you doing today?

Peter Kim: I’m doing great, thanks for having me.

Theo Hicks: Thanks for coming on. I’m looking forward to our conversation today. A little bit about Peter – he is the owner of the website PassiveIncomeMD.com, where he shares his knowledge of passive real estate investing with doctors and other high-income professionals. His website and blog are viewed by over 50,000 people each month. He’s based out of Los Angeles, and you can say hi to him at PassiveIncomeMD.com.

Peter, before we begin, do you mind giving us a little bit more information about your background and what you’re focused on now?

Peter Kim: Sure, absolutely. I’m currently an anesthesiologist living in Los Angeles, California, with a wife and two children. I’m originally from the East Coast, but I ended up out here following my wife, to follow the California dream. I started as an anesthesiologist about nine or ten years ago; I was working, and that was my goal from the very beginning – get out, finish my training, work as a physician, help a lot of people, live a good life… But a few things happened at work – a few things politically, with some job uncertainty – and I got to the point where I realized I can’t rely on this completely, at least this income, to give me the life that I wanted, at least for myself and my family… So I started looking outside of medicine to figure out what else are people out there doing for income for this concept of financial freedom, and I landed on real estate.

I had some other physicians that I saw who were living the life that I wanted, and they were pretty much all doing real estate… So I started exploring that, I started learning so much about it, I started going online, listening to podcasts, reading blogs, and the next thing you know, I started doing a few deals, started picking up a few rental properties, I started investing in some syndications and crowdfunding. I was telling all my friends about it, and they wanted to know exactly how I was doing it. I guess I got tired of having the same conversation over and over again, and I started just to put it up on a blog. I started to write about it, share my experiences, talk about some of my mistakes, my failures, some of the good stuff that was happening, and the next thing you know, organically people started to come [unintelligible [00:04:49].26]

Theo Hicks: I’m sure working as a doctor you work a lot of hours… So for other people who are also working a lot of hours, what advice do you give them to get started in this real estate investing endeavor?

Peter Kim: Yeah, my life as a physician is pretty busy, and for anybody who has a job, anybody who has a family, anybody who has hobbies or passions, you’re gonna be busy. So it’s not really a matter of finding time, it’s a matter of figuring out what your priority is. So what I would do is I would work a long day, I’ll come back home, I’d see the kids, try to spend my time with them, spend my time with them and my wife, put them to bed, and then at that point is when I would get working; and I would work from 8 PM to maybe midnight, work really hard, maybe sleep for five hours, wake up, and I’d even start working at it again.

So I would find the time just to do these things, and unfortunately some things I had to give up. I don’t watch TV as much as I used to before. Some of my favorite shows are just sitting there, waiting for me… But you just have to make the time and just take the action, and really figure out what’s important to you and what your goals are in life.

Theo Hicks: And are you strictly doing passive investing, or are you an active investor as well?

Peter Kim: I do both. I like the idea of diversifying. I started by investing in crowdfunding, I started investing in syndications first, because my lack of experience — I didn’t know how to start; I didn’t know whether I could take on a rental property on my own. But once I kind of dipped my feet in using those things, I started feeling more comfortable, got a little more confident. Then I started buying my own rental properties. I bought a single-family home. Then I bought a single-family home out of state. Then I picked up a few multifamilies. But then all along the way I’ve still continued to invest passively as well.

Theo Hicks: Okay, so you started off passively and then transitioned into actively, while continuing to passive invest… What skills, knowledge, anything that you’ve learned from passive investing helped you transition into active investing? Or did you have to learn active investing completely separately from your passive investing?

Peter Kim: That’s a good question. I think a lot of it just had to do with confidence for me. It’s just putting your money somewhere else to work. I was so used to working as a physician, doing the active income thing where you put in your time and you make money… The whole concept of investing, putting your money elsewhere, letting things happen, setting a system and letting things happen in place was totally foreign to me… So I kind of just had to get over that, and that’s what really passive investing helped me to do.

The funny thing is once you start passive investing, start investing in those syndications, in some of those crowdfunding debt deals and some of those equity deals – you know, I started actually looking to the numbers, I started learning. It wasn’t a whole lot of money when I first started, but just having a little bit at stake really forced me to get in there and learn. So I started learning about “Yeah, what is rental income? How do you increase these types of things? What’s cap rates? Net operating income”, I started learning about some of those numbers, and then – again, it gave me the confidence to go out and purchase my own properties. So there was definitely a hurdle that I needed to get over initially, and really passive investing helped me get there.

Theo Hicks: Yeah, I think that’s really important that you said that. I think one of the biggest characteristics that differentiates someone who doesn’t and does invest is that confidence. You learn everything, but do you have the confidence to actually take action and actually do it?

Peter Kim: Right. The thing is you have to be okay with failing. I think what I’ve learned is that you can sit there and read all you want, you can sit there and learn, but it’s like a totally different ballgame once you get in there… And you learn so much more by just getting your hands dirty. And I think I got to the point where I realized, “Look, I’ve gotta take chances here and I’ve gotta move forward.” I was just sitting there reading and learning and I wasn’t doing anything, so unfortunately I wasn’t growing as well… So a part of it was that “Look, I’m gonna make some mistakes, but I’m gonna learn a ton in the process”, and that’s actually what ended up happening.

Theo Hicks: Exactly. So when you’re talking to doctors and other high-income professionals about getting started in passive investing, what advice do you give them? Or let’s say if they wanna invest in a multifamily property with a syndicator – what advice do you give them for finding, evaluating and screening different general partners, different syndicators?

Peter Kim: Well, that’s the number one question I get through my blog… And I also have a community of about 7,000 physicians in a Facebook group that I work with and I moderate and I talk to, almost on a daily basis. We talk about different syndications, different opportunities, ways to make passive income… But again, the number one question I get is “How do you choose which syndicator or operator to trust? How do you know a deal is good? How do you verify what’s on paper?” So we spend a lot of time, and unfortunately that’s not an easy question; I think that’s a thing that even professional syndicators – that’s something that they’re continually refining and learning.

So I do spend some time on the blog, writing post, by post, by post, and we spend some time actually going through even some case studies in the Facebook group… But one thing that I’ve actually done recently to really help people in this manner is I’ve actually built a course. Again, so many people were asking me “What are some of the best resources out there for people?”, so I decided to really package that and put that into a course that hopefully condenses all those months and years that I spent trying to learn about this stuff, really only into a couple hours, for the busy physician.

Theo Hicks: Here’s a more specific question – what would you say would be the top characteristics of a syndicator that you can trust? What are 2, 3, 5, whatever things that a syndicator must do in order to gain that trust from a passive investor?

Peter Kim: I tell people the number one thing to look for is track record. I want someone who’s already established and has experience doing this thing. Ideally, this is somebody who’s seen some of the ups and downs of the markets and that has been able to navigate that. Obviously, there’s so many good deals out there and there’s so many bad deals, but what will make or break a deal is the way the sponsor can really operate and execute their business plan… So I go back to their history to look and see what they’ve done in the past. Again, it doesn’t have to be a spotless record, because obviously, what happened in 2007 and 2008 – there were some ups and some downs. Ultimately, how did they navigate through that thing?

So number one is track record. Number two – I feel more comfortable if somebody else that I know has invested with them, or somebody that I trust has invested with them… So that’s what I look for. I look for other people who have already invested with them, have a personal relationship with those people and can kind of tout, or vet, or attest to how good they are in terms of communication, how they’re executing their business plan, how they’ve been in terms of professionalism, that sort of thing. So that’s what I look for next.

Then after that, I need to have a personal conversation with them, and I recommend every single person does that. What we’re gonna do with this course, and what we’re gonna do even on the website, is I wanna give them the top ten questions they need to ask sponsors… And they should be doing these things themselves. I know on a lot of these crowdfunding platforms they kind of put the track record, and these kinds of things, of all the sponsors, and they’ve done the vetting… But I think it’s really important for doctors – or any busy professional – since they’re putting a good amount of their income to use, is to actually personally vet them themselves.

Theo Hicks: Alright, let’s change gears a little bit and talk about your blog. So you’ve got 50,000 people a month reading your blog… Before we talk about how you did that, do you mind telling us a little bit about the positive benefits that has had on your business, your life in general?

Peter Kim: Sure. When I started this thing I didn’t even know who would read this thing; I actually really created it just for a few of my friends to read, so again, I wouldn’t have to answer the same questions over and over again… But it kind of blew up on me, and that’s something that kind of took me by surprise. I’d be lying if I said I expected to build a readership like this… But it’s been amazing.

Obviously, I’m still learning, and I try to tell people on the site, I am not the one who knows every single thing about this whole subject, but it’s something that maybe I’m a few steps ahead of people… And this is what I’m learning, and this is what I’m doing, and this is the mistakes I’m making along the way… And the cool thing is it’s put me in the center of this community, and I’ve met so many great — not just physicians, but even professionals in the business that are doing some amazing things, and it’s really inspired me to get better at this. So I love just being able to be in the middle, to connect with so many people, and I feel like it’s opened up my whole world to a lot of different things that different people are doing. And again, every day I get inspired by somebody else, so that’s what’s been amazing.

The other thing is it’s really allowed me to connect to a lot of physicians who are in the same position really that I was, where they felt kind of stuck in their position; they’re making good incomes, but they don’t really have that time freedom, that financial freedom, and they didn’t really know what to do to get to the next step. So I’ve connected with a lot of physicians like that, and it feels great to have something to offer them, and just really connect with those people. That’s been an amazing experience for me.

Theo Hicks: Okay, and now the last question before we get to the money question – how were you able to get to the point where you had 50,000 blog views per month?

Peter Kim: I wish there was a magic formula to that, but again, I think a lot of it has to do with consistency. You guys do that same thing with the podcast – you guys are doing it every single day, and people know that they can rely on you to provide information every single day. So on my blog what I started doing was just putting out consistent content, and I try to put obviously good quality content every single time, something that was of value to people… And I actually put out something about three times a week; that’s been really busy, sometimes a little bit of a struggle for me to do that, but I think that consistency is what’s really helped grow the readership.

What I also do is spend a lot of time engaging with people, both on the blog, on the Facebook group, and I make sure that everyone feels that they’re able to get value out of this. Honestly, it’s been a slow growth; nothing special, but over time it’s just continually started to grow. There’s no magic formula to it.

Peter Kim: The best advice that I would give is just get started. I’m sure other people have given that advice as well… But so many physicians – especially physicians – wanna make sure that they have all the information before they decide to take action. I think that’s what we do with our patients – we take all the greatest information out there before we make a course of action and make a plan for people… The problem is in this world you’ve gotta take action sometimes to learn, and to get better, and to grow. So that’s my advice.

Theo Hicks: Alrighty. Are you ready for the Best Ever Lightning Round?

Peter Kim: Sure, let’s do it.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break:[00:15:12].28] to [00:15:54].22]

Theo Hicks: What’s the best ever book you’ve recently read?

Peter Kim: The best book that I’ve recently read is called Never Split the Difference. It’s a book on negotiation by a former FBI lead hostage negotiator, and it’s just really taught me a lot about how to ultimately get what you want in a negotiation, and at the same time help the other person get what they want as well.

Theo Hicks: What’s the author’s name?

Peter Kim: The author’s name is Chris Voss.

Theo Hicks: If you guys listen to episode 1244, it has the interview with Chris Voss. That was back in January of last year. If your business collapsed today, what would you do next?

Peter Kim: I would just start over again. I would just build it a little bit, by a little bit, by a little bit, but hopefully that won’t happen.

Theo Hicks: And how would you start over if you had little or no capital?

Peter Kim: Again, luckily, this thing doesn’t take a lot of capital. It’s a lot of time, energy and effort, and that I have a ton of… So I would definitely just continue to do this.

Theo Hicks: What is the worst deal that you’ve done?

Peter Kim: I would say the worst deal that I’ve done is the one that I ended up backing out of. I had an opportunity where I was in escrow for a flip, kind of in the lower Beverly Hills area here, and myself and my partners – we ended up kind of freaking out and we actually backed out of the deal. That was about 3-4 years ago. Unfortunately, I looked, and if we had sat there and done nothing with it, we would have made an amazing return and we would have killed it.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Peter Kim: The best ever place to reach me is directly on my website, PassiveIncomeMD.com. I’d love to talk to you.

Theo Hicks: Great. And again, that will be in the show notes of this episode for those listening. Alright, Peter, I appreciate you coming on. Great information. Just a summary of what we talked about – we started by talking about how can people get started in real estate investing when they’re really busy, which is basically everyone… And for your advice and for what you did it was all about prioritizing your time, so just kind of finding the time to get to work, and giving up some of the things you used to do for fun. You said that you’d go to work and then you’d come home, spend time with the family, and then once everyone was to bed, you’d work until about midnight, get some sleep and then wake up and start working all over again, just to kind of get things up and running.

We talked about how you were able to transition from being a passive investor to becoming an active investor, and it was all about having the confidence to take action, as well as being okay with failing. Realizing that you’re gonna learn a lot more by taking action that you would by reading, but of course, with reading you’re not necessarily going to fail, so you kind of have to be okay with that, understand that’s part of the process.

We talked about the three things to look for when you’re looking for a syndicator. One is their track record and history, number two is references, someone that you trust having invested with them before… And three, making sure that you always have a one-on-one personal conversation with the lead sponsor.

We also talked about how you were able to grow your blog traffic to 50,000 users per month. Like most things in life, there is no magic formula. For this it was all about consistently posting high-quality content; for you that was about three times a week… And then as well as engaging with people on your blog, as well as in the Facebook group that you created.

We talked about some of the benefits of that blog, putting you in the center of a community, which allows you to meet physicians and other professionals, which was giving you inspiration and you also felt good to help out people and connect with people that are currently in the situation that you were in the past. Then your best ever advice was simple, but also powerful, which is just get started, and take action.

Again, Peter, I really appreciate you coming on the show today and offering your advice. Thank you to everyone who listened. Have a best ever day, and we’ll talk to you soon.

Kyle left his full time job just eight months ago (as of this recording) and already closed on his first multifamily syndication. He started out in real estate like many of us, working full time and buying single family homes. Hear how and why he was confident in leaving his job, and what it took to close on his first syndication. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Kyle Mitchell. How are you doing, Kyle?

Kyle Mitchell: I’m doing well, thanks for having me on, Joe.

Joe Fairless: Well, I’m glad to hear it, and it’s my pleasure. A little bit about Kyle – he’s the managing partner and co-founder of Limitless Estates. Recently he closed on his first multifamily syndication, in May 2019. Based in Los Angeles, California. With that being said, Kyle, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Kyle Mitchell: Yeah, absolutely. Thanks for having me on. What we focused on is value-add multifamily out in the Arizona market. In fact, about 18 months is when we first found multifamily and got started educating ourselves; I left my full-time job about 8 months ago to pursue this full-time. As you mentioned, we’ve just closed on our first project, a 42-unit property out in Tucson, Arizona a couple months ago.

Joe Fairless: Well, you’ve got a lot of exciting things going on. Congratulations on the closing. So you said you focused on multifamily 18 months ago… What were you doing at the time as a profession?

Kyle Mitchell: I was a regional manager for a golf management company. I oversaw about 20 million dollars in revenue, and had about 250 employees. You can think about our company kind of like a third-party property management company; municipalities would hire golf management companies to come into their properties and manage their facilities for them.

Joe Fairless: Okay, got it. And your role specifically within that was what?

Kyle Mitchell: I was a regional manager [unintelligible [00:03:37].12] general manager. So I oversaw the operations of the golf courses, and the day-to-day business.

Kyle Mitchell: Yes, correct. I’ve always been an entrepreneur at heart and I’ve always wanted to leave my full-time job, and I’ve just been waiting for the right time to do it, and find the right vehicle. And about six years ago I got started investing in single-family homes, and much like many people, I learned I can’t scale as quickly as I wanted to… And that’s when I started looking into multifamily.

Once I found multifamily, I fell in love with it, I fell in love with the business model, and as soon as we felt like we had enough of an investor base, enough knowledge and a big enough network, I decided to leave and pursue this full-time.

Joe Fairless: Oh, okay. Let’s talk about the single-family stuff, so we get a full picture of your real estate background. What single-family properties have you purchased?

Kyle Mitchell: I have nine single-families; they’re all out of state. Some in Arkansas, Chicago and Ohio area. I bought them all turnkey about 4-5 years ago. At that point, I was just trying to get some passive income while I had my full-time job. Then, as I mentioned, I quickly realized it’s tough to scale, especially with turnkey, so I decided to become more active in the multifamily syndication space.

Joe Fairless: Okay. Do you still have those nine single-families?

Kyle Mitchell: I do, although I am trying to dispose of those. They do cashflow, but right now I wanna put that capital to work in multifamily.

Joe Fairless: Okay. So are you trying to sell them as a portfolio, or just one-off transactions?

Kyle Mitchell: [unintelligible [00:05:13].14] them in three different markets, so basically I have two in Arkansas, and I’m trying to sell those as two; three in Ohio, trying to sell those together, and then the four in Chicago. So three different portfolios. But if I get an offer, one-off and I’ll take those as well. Unfortunately, those have been kind of my worst deal. I bought them turnkey, and at the time I thought they appraised; they did appraise, but it’s looking that they’re worth less than what I purchased them for… So I’m having a little bit of trouble selling them, so I might have to take a loss on them.

Joe Fairless: Okay. Let’s talk about the 42-unit. When you said that “We got focused on it 18 months ago”, or introduced to it – who’s “we”?

Kyle Mitchell: We is my fiancée, who’s my business partner. She still has a full-time job, but she helps with raising capital.

Joe Fairless: Okay. The 42-unit that you two purchased – were you two the only general partners in the deal?

Kyle Mitchell: When we started out, yes. We tried to do it on our own. We had a little bit of trouble raising capital, and a little bit of trouble actually with the lender, so we had to switch lenders last-minute and go with a Fannie Mae loan… So we had to bring on two other partners to help sign on the loan and raise a little bit of capital on the side.

Joe Fairless: Okay. Let’s get into the specifics of the 42-unit. How did you find it?

Kyle Mitchell: Well, by driving the market. We look in the Arizona markets. We live in Southern California, so what we would do is every other week we would drive down to Tucson – it takes about seven hours, so we leave at [2:30] in the morning, get in around 9 or 10, and on the way we would call brokers and tell them we’re gonna be in town and asking if they had anything available.

It so happened that one of the brokers just got the listing that morning, hadn’t toured the property really themselves, and asked if we wanted to tour it… So we were the first ones to take a look at it, and as soon as it went to market, we had basically already put our offer in. So we had about a three-week headstart, and about a week later we got it under contract.

Joe Fairless: How many times did you do that seven-hour drive prior to purchasing the 42-unit?

Kyle Mitchell: I would say at least ten, and we still continue to do it. Sometimes we fly out of here now, but we were out in the market every other week.

Joe Fairless: Okay. And what are you doing in the market every other week, now that you have a property?

Kyle Mitchell: We’re just meeting with brokers, telling them about that property; we’re also meeting with potential investors, local people, and just trying to get to know the area a little bit better. When you’re dealing with out of state, you don’t know all the areas of the market unless you’re driving it and spending some time in it… So we like to do that, and then we’re buying brokers lunches, coffees, whatever we can do to build better relationships.

Joe Fairless: So you got it through a broker… What was the purchase price?

Kyle Mitchell: 1.65 million.

Joe Fairless: Okay. And total equity you raised was how much?

Kyle Mitchell: A million.

Joe Fairless: And I imagine, since it was an agency loan, you raised the cap-ex budget from the equity from the investors, right?

Kyle Mitchell: Correct. Closing costs, around 600k, and then we raised another 350k or so for the renovations.

Joe Fairless: And what are you doing, renovation-wise?

Kyle Mitchell: Full paint job, changing out the doors… This property specifically has sliding glass doors, believe it or not, so number one, it’s a safety issue, and number two, the doors just don’t work very well, so there’s a lot of maintenance that has to be done on them. So we’re replacing them with full wood doors on there, changing out the railings, and rebranding and re-signage. We’ll add a small little dog park and a barbecue area.

Joe Fairless: And you bought that in May, so… Very recent. What have you learned so far, after about a month or so on the property?

Kyle Mitchell: That the residents just have not had communication with the previous property management, so we’re bringing someone in there and spending time on the property, and they’re really loving the feedback that they’re getting from the property management, someone on site.

We’ve also learned that we’re able to get the market rents that we were hoping for after renovations, prior to renovations. That’s good news.

Joe Fairless: Excellent. Yeah, that’s great news. Congratulations on that. What is the rent bump that you’re looking for, or you have been achieving?

Kyle Mitchell: About $125, plus an additional $35 for RUBS.

Joe Fairless: Yeah, good for you. How long is the loan? When does it mature?

Kyle Mitchell: It’s a six-year exit plan, but obviously, if we’re able to exit out of it a little bit sooner, depending on the rents that we’re gonna get after renovations, it’d be great to exit out of it in about year two, or do a refinance.

Joe Fairless: In terms of the equity raise, what about it was surprising when you were initially doing it, and then you needed to bring on another partner to complete it?

Kyle Mitchell: Yeah, so the first time raising capital, you really get a peek behind the curtains of people’s lives. We anticipated that we’d be able to raise a million dollars, and we ended up raising 900k of that, but things happen in people’s lives, and it’s a whole timing issue. So whether someone’s having a baby, or someone’s out of the country for a month, or someone’s closing on another property so they need to show liquidity to the bank…

All these things come up where life just happens, and really when you’re raising capital I would say you wanna anticipate at least two times the amount that you wanna raise. If you wanna raise a million dollars, you wanna know that you have two million banked on.

Joe Fairless: What are the terms that you have with this deal, in terms of GP, LP, pref, all that.

Joe Fairless: Okay. So the acquisition fee isn’t something that you’re able to retire off of, clearly, but it certainly helps… But you left your job eight months ago, so how did you decide “Okay, I need to leave my job (or I want to leave my job, however it transpired) and I’m gonna make it on my own with this real estate investment career”?

Kyle Mitchell: Well, first, I have an amazing fiancée who is supporting me through this and said “Let’s do it”, and number two, I just feel like if you’re gonna go all-in and be one of the top players in the game, you’ve gotta go full out. That’s just something that I decided to do. Back when I still had my job, we were still coming out to the market and we were still competing, but I just don’t think that we were competing to the level that we needed to. We weren’t building the relationships we needed to, we weren’t networking as much as we needed to, we weren’t building our investor base as much as we needed to, and the only way to do that was to be full-time and to go full-out with it… So we just decided to take a leap of faith and go after it hard.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

Kyle Mitchell: Get out of your comfort zone. If you’re not pushing yourself to places you’ve never been, you’re gonna be stuck in the same spot forever.

Joe Fairless: Well, you certainly did that, and also I’m sure you’re very thankful for your fiancée and her full-time job during this interim period.

You’ve got a 42-unit, and you have a couple partners… How did you find the partner who ended up bringing the balance sheet for the loan?

Kyle Mitchell: Through networking. We have a meetup group that we’ve had for about 14 months now, and I’ve met him through that group; we started talking, and ten months later he approached me and said that he’d be interested in possibly partnering on a certain deal. He had the balance sheet and the experience, so I called him up and asked him.

Joe Fairless: And how do you structure that with someone who brings that to the deal?

Kyle Mitchell: I think it depends on the deal and the person, but basically we gave him a certain percentage for signing on the loan for us. Real estate is a team sport, as they say, so there are several pieces of the pie and you’ve just gotta figure out what pieces you can add to it and where other people can add to that pie.

Joe Fairless: And what’s the range of equity that that person would get on a deal?

Kyle Mitchell: I’d say anywhere between 5% and 15%.

Joe Fairless: Knowing what you know now, now that you’ve completed your 42-unit purchase, if you were presented the same exact deal this week, I’m sure there’s something you would do a little bit differently than you did going into the 42-unit transaction… So what’s something you’d do a little bit differently, if presented the same opportunity this week?

Kyle Mitchell: I would have set up the team in advance, and not try to do everything myself. And then secondly, I would have probably better communicated with the lender what my plan was on the property, and the GP structure.

Joe Fairless: Will you elaborate on that? I should have asked some follow-up questions about the lender and the loan, what transpired with that…

Kyle Mitchell: Originally we were gonna go with a Freddie small balance loan, and we were gonna try and do the full raise by ourselves. We had an extension built in just in case we weren’t able to, but at that time I failed to communicate to the lender that we’d be adding GPs later in the game, so… Basically, with Freddie, they applied for the loan prior to that; they got to the point where it was too late to add on a GP, so we actually had to move lender and go with a Fannie Mae loan, and switch lenders completely.

Obviously, with 30 days left it was a scramble at the end, but we were able to get it closed… And it worked out in the end. We ended up getting a 80 basis point discount on the interest rate, because the interest rates had lowered so drastically.

Joe Fairless: Oh… [laughs] That’s good.

Kyle Mitchell: It ended up working out, yeah.

Joe Fairless: Yeah, I’m glad to hear that. Who did you have as your point person throughout that process? Did you have a mortgage broker?

Kyle Mitchell: It was a mortgage broker, correct.

Joe Fairless: And how did you get to know the mortgage broker?

Kyle Mitchell: Through a podcast, and networking, and going to certain events… And we had built a relationship with that person over the last 5-6 months. I feel bad that we had to bail on that deal, because we had built up that relationship, but unfortunately, based on the situation, they were unable to help me… And by switching over with someone who the other GP had a good relationship with, we were able to get it closed.

Joe Fairless: Did you say you run a meetup group, and have been for about 14 months?

Kyle Mitchell: Right, we joined in on another meetup group; we were the second chapter to join, and we’re now eight chapters, and we’re about to go nationwide towards the end of the year… But we’ve been doing that for about 14 months; we have about 1,400 members in our group, and I also have a second one that I started earlier this year that’s more of a smaller roundtable for multifamily.

Joe Fairless: Oh, cool. How do you structure the second one?

Kyle Mitchell: It’s a roundtable, there’s only about ten people that come, and everyone gets to go around the table and talk. They’ll talk about their goals, what they’re doing in the next 30 days to accomplish their goals, what have they achieved over the last seven days, if they have any needs or wants, and any opportunities.

I like it because everyone in that group gets to speak, whereas at our other events, which are great as well, they’re more education-based. So it’s networking, but not every person gets to speak their mind and share what they’re going through.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Kyle Mitchell: The best ever single-family home purchase is the ones in Arkansas. I like Arkansas because it’s such a landlord-friendly state. If you are late on rent, even one day, you can evict them… So – knock on wood, I’ve never had a late payment on rent in Arkansas.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Kyle Mitchell: A mistake was buying turnkey rentals out of state, site-unseen, especially the ones in Chicago. I’m still dealing with those problems right now.

Joe Fairless: What’s the best ever way you like to give back?

Kyle Mitchell: Through our two monthly meetups, and then we also have a podcast, and we also host free webinars to help educate others in the space.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Kyle Mitchell: You can either give me a call at 562-833-5010, email me at kmitchell@limitless-estates.com, or check out our podcast, passive income through multifamily real estate.

Joe Fairless: Kyle, thank you for being on the show. Congratulations on the 42-unit. Thanks for sharing the lessons learned from the capital raise, as well as getting the right team members in place, how you and your fiancée have positioned your company to be at this stage, the seven-hour drives you two were taking, at least ten times, in order to get the transaction… And everything that you’ve got done to get to this point.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Antoine has been investing in real estate for four years now, and he’s only 23. Turnkey was not always the business plan, but that is what the company has grown to. Just two years ago, they did 10 houses, last year they did 60, this year they’re on track to complete 100 deals. Learn what he does to grow his business to 100 deals per year in four years. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“From the networking, I had a pool of people that were interested in turnkey rentals” – Antoine Martel

Antoine Martel Real Estate Background:

23 year old real estate investor

Does 100 flips per year (turnkey rentals), owns a 20 unit apartment building

If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Antoine Martel. How are you doing, Antoine?

Antoine Martel: Very good, how are you? Thanks for having me.

Joe Fairless: Yeah, my pleasure. I’m doing well, and looking forward to this. Antoine is a 23-year-old real estate investor who owns a 20-unit building and does 100 flips per year that are turnkey rentals. Based in Los Angeles, California. With that being said, Antoine, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Antoine Martel: Sure. This all started four years ago when I was 19 years old. I was in university, I went to Loyola Marymount University down here in Los Angeles. I didn’t wanna get a job after graduating, I wanted to go and do my own thing. I was studying entrepreneurship at LMU, and I wanted to really start my own company out of college.

While I was at university I went to a real estate investing seminar. They were talking about flipping houses, and wholesaling, and all the different ways that you can invest in real estate, and flipping houses was the most interesting to me… So I started to make all these offers in Los Angeles, but I didn’t have much money in the bank account; I was just a college kid, and my parents didn’t wanna fund a full rehab project for a million bucks here in Los Angeles, so after placing 20 offers a month for a number of months and never got anything under contract, I realized I needed to change my strategy. That’s when I heard about rental properties out of state, and I thought that would be the perfect fit for my parents.

My dad owns his own company, my mom had her own company, so no retirement account, no 401K, but my parents had some money saved up, and I thought that it would be a great way for them to have a plan to retire at least, without having a 401K… So I started researching all these different markets out of state, and found a couple of good ones – Memphis, Cleveland, Birmingham, St. Louis. I went to Memphis, TN, bought a single-family home, renovated it, rented it out, and then did a cash-out refinance (the BRRRR strategy). My dad funded that first deal. We bought that first house in my last semester at university. Then I graduated in May and told them, “Hey, I can keep buying these properties out of state and keep growing the family portfolio”, so that’s what I did.

My dad paid for my living expenses for a couple of months so that I can grow the family portfolio, and by the end of that year we had ten single-family homes in Memphis. Then after that friends and family started reaching out to us to invest out of state as well, because they had never heard of people buying properties halfway across the country.

We started selling properties out of our portfolio to our friends and family, which led us to the company we have today, which is a turnkey company. So that’s what started it. We were like, “Oh, okay, we don’t’ have to refinance every single property. We can also sell it and make a profit, and then use that cash to keep growing the family portfolio.” Now we’ve built that company up the last couple of years to where we are today, and in 2019 we’ll do over 100 single-families and duplexes.

Joe Fairless: How many did you do last year?

Antoine Martel: Last year we did 60, and the year before that we did those 10.

Joe Fairless: Wow. Okay – 10, 60, 100. How did you go from 10 to 60?

Antoine Martel: Great question. I raised a lot of money here in L.A. So I was not only working on building teams on the ground in all these different markets, and researching markets, and finding the right projects, but then also we had run out of money, so we kind of started this whole thing with just $50,000. That first house – we bought it with $40,000, renovated for 10k, then did a refinance, and then my dad had all this money back because of the refinance and the way that we financed it. So we were able to pull all our money out and that’s how we grew our portfolio to ten properties.

Then after that I kind of built all these different case studies based on those ten projects, to show people that I knew what I was doing, and that I had rapport, and that I’ve done similar projects and similar project types in those neighborhoods… And then I would just network all day, every day, on Bigger Pockets, and go take people to coffee, or lunch, or dinner, and just share with people what I was doing. That in turn helped me grow my list, and grow my network from zero to 100 people, and those people started funding our deals then. They were equity investors on the turnkey flips.

We would buy a property, renovate it, rent it out and then resell it on our website, and people would fund those projects, they would fund 80%-90% of the project and then get a percentage of the profits. That allowed me to scale; with my $50,000, now I can just put $5,000 or $10,000 into each project, so it allowed me to go from one deal to ten deals really fast.

Joe Fairless: How much did you raise to the best of your recollection that year, from investors?

Antoine Martel: That year… So 60 projects, times $50,000 each, would be around how much I raised.

Joe Fairless: I will do that. Three million. Yup. You raised three million dollars. Approximately how many investors did that comprise of?

Antoine Martel: And again, people repeated their money, because these projects are very quick; they’re two or three-month projects in and out, renovations and reselling… Because we don’t have to list them on the market. So I had the investors — again, from that networking I also built a pool of people who wanted to buy turnkey rentals, so it was great. No matter what, I would walk into those networking meetings, or the coffee, or whatever it was, and I would get something out of it – either an investor, or somebody who wanted to invest in turnkey rentals. So it was perfect for me, because I got both ends of the spectrum.

The amount of investors – it was probably close to 50 investors, but the investors would keep reinvesting their cash over and over, because they would invest 50k, then they would get their money back plus the profit in 2-3 months, and then they were like “Oh wow, this is actually working” and then they would invest 150k. So it helped scale up very quickly the dollar amount that I was able to raise.

Joe Fairless: What were the terms?

Antoine Martel: It was a joint venture. Our LLC would buy the property, they would invest in that project and partner with us on that project, with our LLC, they would fund 80%-90% of the total cost, which is purchase price plus the rehab, and they would get close to 50% of the profits, sometimes a little bit less. So the annualized returns were incredible, because they were making a 10% return, but they were making it in 2-3 months.

I think it was worth giving that return at the very beginning, because then people kept doubling down their money and it helped me really scale the whole company.

Joe Fairless: And that’s why I said “were” those terms… What are the terms now?

Antoine Martel: [laughs] Yes, that’s something, too. We looked at those 60 projects at the end of the year and we were like “Here’s our profit, and here’s the payout to investors”, and it was literally like 50% of the payout. And then we had a little bit of overhead for other things that we don’t really put on a per-project basis.

We changed our model now… We still do joint ventures here and there to those people who are kind of grandfathered in and still have money with us, but we’ve kind of converted everybody to just being private money lenders, where people just lend money and they make 1% a month for a six-month project or less… So 12% annualized return is what we pay out to the investors, and first lien position, and all that kind of stuff.

Joe Fairless: Any points at closing?

Antoine Martel: No points at closing.

Joe Fairless: Okay, so just nice and clean, make 1% a month.

Antoine Martel: Easy. Right to their bank account, too. We just get their ACH, and then every single month they’re paid out. At the end of the project they get their principle back, hopefully they don’t want it back, and they just keep it with us and we keep growing their money.

Joe Fairless: What’s a deal that went backwards/sideways, just terrible on you?

Antoine Martel: I’m lucky enough to not have had a terrible deal yet. We’ve had some deals that have been pretty close to breaking even. We were lucky that we didn’t have any investors in those deals. That’s something else, too – we started doing more and more deals with our own cash, which helps expedite our growth of our own money as well. Raising private money, paying them 1% a month, but then also using our cash more and more to fund these transactions.

A deal that did go south – there’s a couple on the top of my head. One of them was stuff being stolen. We bought a house, and the day we closed, the furnace and all the ductwork was stolen out of the basement of this property in Cleveland. So I went and filed an insurance claim etc. They denied it. Then I replaced the furnace, I paid for it… The renovation was completed, and we were listing it on the market for rent, so whoever was watching the house knew it was vacant, because the contractors had left. Somebody goes back to the house and steals the brand new furnace again.

Joe Fairless: Ooh…

Antoine Martel: [laughs] So they must have been watching this thing, because… I don’t know. They timed it so perfectly. That eats your profits… A couple thousand bucks we had to pay out, times two, and our projects are pretty slim on the profit… There’s a big margin, but the profit dollar-wise is pretty small… So yeah, two furnaces and all the ductwork being stolen out can take a heavy hit on your profit… But we were able to probably break even on that deal still, even though we got all that stuff stolen from us.

Joe Fairless: Did you put another furnace in it?

Antoine Martel: Yeah, we had to, because there was tenants moving in.

Joe Fairless: Do you do anything to try and protect it?

Antoine Martel: We can do that with HVAC units. We can put cages around them etc. What we actually ended up doing was we waited for a tenant to set a move-in date, and then 24 hours before the move-in date we went and installed the furnace. These people who do this, who are stealing it, could be contractors, or contractors’ friends, or somebody who has a lockbox code… But they really watch the property and they check to see if the properties are vacant. They don’t wanna do it when somebody’s living there. Most of the time that doesn’t happen, so… We decided to just install the unit as soon as the tenant moved in.

Joe Fairless: How were they getting in?

Antoine Martel: There was a basement, and then from the backyard there was kind of a barn door that would open with a left wing and a right wing, and they went and just popped off that lock every single time, because it was a piece of crap. So they just kept popping it off and breaking in through that little door in the back.

Joe Fairless: Isn’t there some video or security system, like maybe Simply for something like that, that you could install relatively inexpensively?

Antoine Martel: Yeah, we’ve never thought of that, because this doesn’t happen very often. We’ve done probably close to 100 projects now over the last couple of years and it’s happened twice where stuff has been stolen and restolen. Most of the times the insurance company will cover it, up to like a $10,000 a personal property… It just so happened that this time the insurance didn’t wanna cover it. Normally, we’re protected with that insurance company, just this time, for whatever reason – it was the timing, or something – they didn’t wanna cover it.

Joe Fairless: Alright, you live in Los Angeles. Your projects are not in Los Angeles. How do you navigate contractors, what are some tips you have?

Antoine Martel: Great question. I get this question all the time too, from people who are looking to invest out of state. One thing that I do where I haven’t had too much of an issue with contractors – I had only started having issues with contractors when I got into multifamilies. Again, I bought a 20-unit building back in December, a couple months ago, and we’ve only had troubles with contractors who are doing special things – HVAC, or electrical, or plumbing; just those contractors, the special contractors have been hard for us to find and navigate.

The general contractors have generally been – knock on wood – pretty good to us thus far. I think the reason why is just the method that I have used to find and vet those contractors. What I mean by that is I never picked up the phone and called a bunch of contractors and vetted them over the phone. I never went and visited, or shook hands with contractors, or personally chose a contractor for my project. The reason why is I’ve set up my teams on the ground to have a project manager (you can call it) for every single market, and those project managers have been people who have been doing real estate and renovation projects for many years in these markets, so they already have the contractors that they really love and like on speed dial.

I have been hiring these people to manage those projects, manage the contractors, and choose the contractors for me. I think that by doing that I haven’t had too many issues with general contractors, because I have that person who already has those pre-existing relationships with contractors on the ground actually manage the team. Some of these people – they go for beers after work, and they’re friends, and they hang out, and their families know each other… So if I just come in, the guy from California, and meet that guy from an ad, or calling him off of HomeAdvisor.com, or something like that, he may not trust me as much; but I think that putting that buffer in place – now it’s John’s project, and they’re friends with each other, but it’s unrelated to me, and they already have that pre-existing relationship.

Joe Fairless: How do you find the project managers?

Antoine Martel: There’s a couple of ways. Most of my project managers are either realtors, or they work in some fashion with the property management company. The most important thing for me, having a turnkey company and having rentals out of state, is the property management company. They play an integral part in the renovations, in taking the photos, in getting the properties rented… So a lot of these property management companies will have people already; a lot of them are required to have agents on board on their staff and on their team, in order to sign the lease agreements and all that kind of stuff. Many of those people also buy and sell real estate on the side…

So when I first go into a market, I try to find the best property management company that I can find; I don’t need it to be a huge property management company, with 3,000 doors. I’m fine if they have 300-500 doors or less; 200 doors is fine with me as well, as long as they can have somebody on staff who can help me grow my business, which therefore will help them grow their business. So if I can pay somebody off the property management staff, or just an outside realtor to manage my project, and then once that renovation is done, they help me take the photos, and then the property management company comes in and they’ll rent that property out… And they’ll be able to grow their property management business all because they helped me get the project from point A, which was unrenovated and not tenantable, to rented out. Now the property management company gets to grow their business by helping me take the project from unrenovated to renovated and rented out.

Joe Fairless: What fees do the property management charge you?

Antoine Martel: All of my property management companies charge first month’s rent as a lease-up fee, and then they charge 10% of collected rents on an ongoing basis.

Joe Fairless: Let’s talk about that 20-unit apartment building… When did you buy it, what are the numbers, where is it?

Antoine Martel: Sure. The apartment building is in Memphis, Tennessee. 20 units. We bought it in December of 2018. We bought it for a million dollars, so $50,000 per unit. The renovations entailed of full exterior renovations – painting, removing the bars off the windows, renovating the courtyard, installing all new doors, all new lighting, all that kind of stuff, and then also renovating the interior.

The rents when we bought the property were $550/unit. This is a B class, B- neighborhood. It’s in between a hospital district and a bunch of hipster upcoming hot spots. There’s a lot of young millennials, young professionals moving into the neighborhood.

Joe Fairless: What area of Memphis is it, for anyone familiar with it?

Antoine Martel: It’s in Midtown Memphis. The rents were $550/unit when we bought it. Our initial underwriting was we can renovate the units, renovate the exterior and increase the rents to $725. It turns out that we were actually able to raise the rents — we spent a couple thousand dollars more per unit to get stainless steel, and granite countertops, and all this kind of stuff, and we were able to get the rents from $550 all the way up to $850, and we’re about halfway done with all of the units now, and just slowly as tenants leave we’re renovating the units and re-leasing them up for a much higher rent than we thought.

Joe Fairless: How much are you investing per unit?

Antoine Martel: Per unit it’s gonna be around $7,500.

Joe Fairless: That’s a 48% return. That’s pretty good.

Antoine Martel: Yup. [laughter] Yeah, it’s very good. And then the goal is to do a cash-out refinance with Freddie Mac at the end of the year, and just like we started with the single-family homes, do the same thing for the apartment building. We’re expecting to be able to pull out all our money at the end of the year, when we get long-term Freddie Mac financing.

Joe Fairless: A 20-unit last December, that is a value-add deal… How did you find it?

Antoine Martel: Great question. For about nine months last year I built a list of brokers on LoopNet, and others methods, just collecting as many brokers in the multifamily space as I could, who are doing apartment buildings or multifamily in Memphis, Cleveland, Birmingham, all of my markets. And I collected this list of brokers and called them first, and told them who I was, what I was trying to do, what I was looking for, my criteria, and then every two weeks I set it up on just a calendar thing – every two weeks I would either call or e-mail these people, reach back out to them, ask them if they have any deals available, if they have anything that fits my criteria.

So every two weeks for about nine months I did that, and then it just so happened I emailed one of those brokers on a Thursday night, and he said “Oh yeah, I just got a deal that fits these criteria perfectly. I’ll send it to you in the morning.” Friday morning he sends me a little jenky email with a couple of sentences and he says “Hey, you’ve gotta make an offer before we send you the financials.” I was like, “Okay, well, my offer is a million bucks then. There’s nothing else I can do.” The numbers worked at a million bucks based on the tiny information that I was given.

Joe Fairless: What info did they give you?

Antoine Martel: He told me 20 units, one-bedroom/one-bath units. He told me what the average rents were; he just wrote “Average rent – $550.” And then he told me the operating expenses, whatever the dollar amount was, and then like a taxes dollar amount, insurance dollar amount. And the last sentence – “You need to submit an LOI before we give you any other information.” I was like, “Okay…” He left me between a rock and a hard place.

So I just did a super-simple back-of-the-napkin thing, and the price per unit made sense, the rents definitely needed to be increased, so based on that we just submitted the LOI. And I wrote in the LOI that due diligence doesn’t begin until I get all the financials. I wanted to make sure that they actually had some financials, because trust me, there’s some landlords who just don’t even keep records, and they just keep it on a napkin as well.

Joe Fairless: Let’s go back in time – we don’t have to go back too far, because it was fairly recent, but… You said you did that for nine months. You made a list first, and then you called or e-mailed brokers from your list, every two weeks, and you followed up with them. Let’s travel back in time to month eight. So you still haven’t got a deal, but you’ve been doing this for eight months. What internal thoughts do you have at that point in time?

Antoine Martel: That’s hard… You just have to keep going, and I just kept listening to podcasts like this; people just kept saying “Yeah, just keep following up with the brokers, keep following up with the brokers.” So what I would do is I would just kind of keep changing my e-mail, and… I analyzed a lot of deals in those nine months, so I knew that it was working. It wasn’t like I wasn’t getting any replies, or I wasn’t getting any deals. Every time I would email, I would get a deal; maybe something on the market, or whatever… But sometimes I would get these off-market deals, I would run the numbers and go back to the broker and tell them “Hey, this deal is just way too overpriced. I can’t make this make sense at this price, but keep sending me stuff that you have.”

So there was this relationship that I was building, because I was replying to these people’s e-mails, giving them feedback on their listing from an investor’s perspective… So throughout those eight months – yeah, it was hard to keep going and to keep analyzing deal after deal after deal after deal, but I just knew that the break had to come eventually, and there had to be some landlord or some owner who was distressed, and it just so happened to be one month later, after those eight months of e-mailing and underwriting probably a hundred deals, that I was able to find the deal that made sense.

Joe Fairless: How many brokers were on the list?

Antoine Martel: I think 20, in a bunch of different markets, too.

Joe Fairless: How long does that take you to go through and follow up with 20 brokers?

Antoine Martel: Probably 30 minutes.

Joe Fairless: That’s it?

Antoine Martel: Yeah, because I had a template email just in my notes…

Joe Fairless: What did it say?

Antoine Martel: It was “Hey, my name is Antoine Martel. I’m a real estate investor, I own a turnkey company called Martel Turnkey. We buy, rehab and resell 100 homes a year.” And then I would say “Hey, I’m looking for apartment buildings in (whatever the market is) Memphis, Cleveland etc. I’m looking for 20 units or greater, less than 3 million dollars, cap rate between 7% and 8%, and I’m looking for 90% occupancy or higher.” That’s kind of what the template said.

The last couple of sentences would be — I would change it up every single time. I would say something like “I just did a huge cash-out refinance…” I had a four-unit building last year that I bought as well, so I had done a cash-out refinance, so I would just include that little two-cent change in there as well. So I would say “Hey, I just did a cash-out refinance, and was able to pull out $250,000, and I’m ready to go. I just got the check from the bank.”

Every time that I would email, or every month I would kind of change up that last final sentence, to kind of tell them why I had cash and why I would be able to close, and that I just sold something, or I just refinanced something and got the money to be able to close.

Joe Fairless: And that’s the first email, because you’re not gonna introduce yourself to the same broker every two weeks, or else you’re gonna get in the spam folder, in his or her e-mail… So what were the follow-up e-mails?

Antoine Martel: The follow-up e-mails were very similar. Instead of introducing myself, I would just say “Hey, by the way, I’m still looking for apartment buildings. Here’s my criteria”, and then “By the way, I just did a cash-out refinance and I have funds available, ready to close.”

Joe Fairless: Every couple of weeks you’d just mix up the talking point. Sometimes you requalify yourself with “I just got a refinance”, sometimes it’s just other things about your criteria, or whatever else… Okay.

Antoine Martel: Yeah. And then let’s say I had a ton of cash in the bank one month, or one day – I would just take a screenshot of it and I would include that in the e-mail, too. Because I think a lot of these brokers get e-mails from California people all the time, and then they don’t really know that the people have actual money and they’re actually looking to close… So I think that showing them the bank account and showing them the number that I had… I kind of made it urgent, like “Hey, I need to get rid of this money. You’d better sell me something.”

Joe Fairless: [laughs] Oh, I love it. And how much was enough? How much would you be like “Okay, now I think I should send this” versus “Oh, they might laugh at me. I don’t know if this is enough.”

Antoine Martel: Since I was looking for 20 units, anything over 500k-600k I would just take a screenshot of it and send it. I think the first time I did it there was a million dollars in an account, and I just took a screenshot and I was like “I’m gonna use this for months.” [laughs]

Joe Fairless: Yeah, forever… [laughs]

Antoine Martel: So I took a screenshot of that, and then for a couple of weeks I would e-mail that and be like “This is urgent. I need to buy something. I need to get rid of this money.” So… yeah.

Joe Fairless: Wow. So smart. Thank you for sharing all of your stuff. I’ll summarize some lessons learned in just a moment, but first, what’s your best real estate investing advice ever?

Antoine Martel: Best real estate investing advice ever is to match your resources to the best strategy that makes sense for your resources. What I mean with that is a lot of people will do all this homework, and study all these different ways to invest in real estate, and buying 20 million dollar apartment buildings may be the most sexy or most attractive to you, but then look at your resources – how much time do you have? How much money do you have? What’s your experience level? Match those three things with the best strategy that makes sense today, that you can get started today… Because trust me, if you have $10,000 in the bank account and your end goal is to buy 100 million dollar or 20 million dollar apartment buildings, you’re gonna have to take a lot of steps to get there. Start with step one. That may not be even related to apartment buildings. It may be single-family, it may be Airbnb etc. But at least get your foot in the door and match the strategy today that makes the most sense for your resources that you have today.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Antoine Martel: Best ever book I’ve recently read was The 10x Rule by Grant Cardone.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?

Antoine Martel: In Cleveland we have this thing called “Point of sale inspections”. When you buy a property, you have to put pretty much a hold, which the escrow company holds until the renovations are completed, and I just realized yesterday that I sold two properties a couple of months ago and didn’t ask for the POS hold money back.

Joe Fairless: Best ever deal you’ve done?

Antoine Martel: The 20-unit apartment building.

Joe Fairless: Best ever way you like to give back to the community?

Antoine Martel: I sometimes go to the Los Angeles National Forest and we plant trees and clean up the shrubs, and brush and replant new trees, and also clean up the existing trees in the forest.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Antoine Martel: I post a lot on Instagram. My Instagram handle is @martelantoine. If anybody wants to reach out to me, all my contact info is on my website, MartelTurnkey.com.

Joe Fairless: I thoroughly enjoyed our conversation. I learned a lot. You’re very wise, and have some great perspective and resourcefulness. Just making a list of brokers from LoopNet, calling them every two weeks, or e-mail them, and doing it for nine months, and giving them feedback along the way when they do send you deals, and then ultimately sending deals and switching up the follow-up process. That’s just great.

And then I loved the “Match your resources to the best strategy to utilize those resources.” I might have butchered that a little bit, but…

Antoine Martel: No, that’s good.

Joe Fairless: That’s the paraphrased version. And also just how you got out of the gate, senior in college, and started the company with your family, and then have grown it from there… So thanks for being on the show; I enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Steven has written a book and been helping others optimize time for the last five years. He says time is our most valuable resource (we agree) and is here today to tell us how we can make the most of our time by performing at the highest levels with our time. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Steven Griffith. How are you doing, Steven?

Steven Griffith: I’m doing great, man. I’m glad to be here.

Joe Fairless: Yeah, I’m looking forward to our conversation. By the way, Best Ever listeners, since today is Sunday, we’ve got a special segment – Skillset Sunday – where you’re gonna learn a specific skill. That skill will be very evident after go through Steven’s bio. Steven’s a nationally-recognized author, speaker, researcher and performance expert. He’s the author of the book titled “The Time Cleanse”, and considered one of the leading authorities on the connection between time, productivity and performance. Based in Los Angeles.

We’re gonna talk about how to eliminate time toxins from your life. With that being said, Steven, before we get into the specifics of that, will you give the Best Ever listeners a little bit more about your background and your current focus?

Steven Griffith: Sure. I’ve been a performance coach for people’s personal business performance for over 20 years now, and my focus is working with entrepreneurs, executives, teams, to increase their performance. My focus now – it has been for the last five years – is dealing with and addressing the biggest issue people have today, not having enough time.

What I’ve done over the last five years, which is the focus of the new book, The Time Cleanse, is research the best methodologies and performance tools in how to start performing with your time, and how to take your life to that next level, and ultimately, Joe, to have time for what matters most.

Joe Fairless: Yes, please. I think 99% of the listeners are nodding their head, “Yeah, we’d love to have a way to optimize my time and be a higher performer during the time that I spend on certain activities…” So how should we think about this?

Steven Griffith: Well, the first thing is we’ve gotta start thinking about time as our most valuable and precious resource, and we also need to have the mindset of protecting it and maximizing its use. That starts with looking at it from a new perspective. You’ll see all types of books and theories on time management; that’s the buzzword. My book, my process has nothing to do with managing time. You can’t manage time. And time management – that mindset was designed when our phones were connected to the wall by a cord. And since we’re now mobile offices, we’re interacting with technology in such a different way, we’ve gotta shift our mindset to performing with it.

The old time management theories were you had a fixed hour, time was scarce, and you had the most done in it. What happens there, Joe, is that it provides time pressure, and it has nothing to do with the relationship. So when we shift to performing with time, we realize that time comes from us, and it’s actually expandable when you know how to use it the right way, and it’s abundant. That’s the philosophy we start with, is that times comes from you and you are in charge of it.

Joe Fairless: Hm, that’s powerful. So thinking about it in the way that time will exist as long as we’re alive, so let’s perform with time… Initially, when I initially said it’s powerful, my gut reaction was “That’s powerful.” But then, as I just started describing it, I’m thinking “Well, wait a second… What is the difference between managing–” Well, I guess I understand the difference between managing time, but I could see how performing with time could be just as stressful for someone, because if they’re performing during the time, then hey, they’ve always gotta bring their A-game to everything they do.

Steven Griffith: Well, that’s a perspective, but the perspective that I work from is this – when you’re performing with time, you’re in the flow with time, and it’s a valued asset and resource to help you get what you want. The old philosophy is you’re working against time. So you can control time. What I stress is a concept called timefulness. Timefulness is being present in the moment, and really addressing the quality, experience and performance with your time where you’re always in control of it.

When you start realizing that you’re in the flow with time, it’s no longer stressful, because you’re controlling it. You’re not having something act on you.

Joe Fairless: I understand that conceptually. How can we take that concept and bring it to life on a practical level?

Steven Griffith: Absolutely. The first thing in the time cleanse is addressing what you really want your time for. You’ve gotta commit to what you want. And I know how committed you are in the work that you do on this podcast, and you’re coaching in the world is getting people to have time to spend however they want; that’s the same philosophy I have. So it’s first committing to what you want. You can’t have everything, but you can have what matters most.

So first in the cleanse process you need to decide what you want. If it’s a fitness desire, if it’s a financial desire, if it’s more time with your family… So you commit to it, and then in the time cleanse process the first thing that we do is we look at everywhere you’re spending time – with your technology, the people, the activities – and we list it all out. Then we ask the magical time cleanse question, “Is this contributing or contaminating to my happiness and success?” But first you have to identify “What are the contaminants?”

What’s happening today, Joe, is we have so many distractions; people are chasing so many things at once, and that’s one of the reasons why they don’t feel like they have enough time. They’re under a tremendous amount of pressure, and they’re not getting forward in their life. So once we identify what the contaminants are, then you have a choice of what to do with it. You can accept that as a contaminant, don’t change it, or you can reject it, and the rejection process is you may change the time of day you do something, how much time you’re doing it, and then lastly, the third choice is you remove it.

In that process, you reclaim time. The average person gets 10 hours, most people get up to 20 hours or more… And then here’s the most important point – it’s right in line with what you coach and what you speak about – it’s then investing it in what I call “high ROT (return on time) activities.” You’re investing that time, between your business or personal, where you get the greatest reward.

Joe Fairless: It makes sense. So 1) know what you want your time for, 2) look at everywhere where you’re spending your time, do an assessment of that more or less, or remove it, and then 3) be focused on investing your time in return of time activities.

One thing that comes to mind when looking at this process is that time management came into play, I imagine — who the heck knows historically where it came into play, and you have more background than me on that (because I don’t have any background, and I’m sure you have a whole lot), but now when people say “time management”, the reason why in my opinion people say “time management” is because we’re inundated with a whole bunch of stuff. We have more things coming at us at once, versus in the past. And that’s largely due to what you mentioned, the device that we keep tethered to us 24/7.

Well, in your approach, you mention “Know what you want your time for, and commit to what you want to do”, and you said for example a fitness desire or a financial desire. So you’re really putting a laser focus on one thing, versus trying to do a bunch of things simultaneously… And I’m all about the power of focus. I think in my opinion the only thing I’d like to learn from you about as it relates to this question is — the reality is we’re inundated with a lot of stuff, regardless of how we focus our time… So how do you navigate living in the world that we live in and being inundated with stuff, whilst still adhering to this philosophy where you have one focus and you’re committing your time towards that one focus?

Steven Griffith: That’s a great question. One of the things that I take readers through in the book is identifying your top five values. As I said earlier, you can’t have it all. If you are trying to have it all, you won’t have any at the level that you want it. So your point is well taken, is that we need to focus on what are the top things in our life that we wanna put our time, energy and focus on? I do what I call a top five values alignment.

For example, it might be health, business, family, relationships, travel. Those might be someone’s top five values. And within that, and depending on what quarter, what month, what year, you may have a very laser focus. So it’s not like you’re not gonna put time in any of those other areas, but when we’re going through the cleanse, we pick what we really wanna accelerate, what we wanna get our full potential activated in, and that’s what we use it for… But we’re absolutely addressing the other values in our life.

Joe Fairless: Okay, it totally makes sense. What are some challenges you’ve seen people have when implementing this process?

Steven Griffith: The biggest challenge is what I call the philosophy “I’ve always done it this way.” We’re not doing the same things we did when we were 18 years old, graduated from high school. We evolve. And so what people get stuck on is they’re stuck in their old patterns. One of the things that I really promote in this process is [unintelligible [00:11:00].00] new activity, starting with things that you can implement quickly, but making a commitment to make progress. Not that you’re gonna change your entire life in one shot – it’s very difficult to do that – but pick areas where you can get traction… But really the key is making a commitment and picking things that I call are non-negotiable. One or two things that you’re absolutely committed to, no matter what.

As we start developing habit patterns, they become basically a ritual in our lives… But it’s like anything when we change something – we get stuck in our own process over time, and it’s making a decision to do something different… But ultimately, getting connected to the why we’re doing it; why we’re spending time in an area. When people wanna increase their business and gain more income, more freedom, what is it for? Understanding what that why is. It may be for freedom, like I’ve just said; it may be to have more energy and vitality, if they wanna lose weight. It’s not just about looking good, it’s the deeper value underneath it. So when we get connected to the why, then we’re more motivated to invest our time in the right ways.

Joe Fairless: You mentioned earlier the third part of the time cleanse is to really focus on return on time activities… How do we think about measuring return on time, and what’s some successful benchmarks for that metric?

Steven Griffith: When we look at return on time, there’s two things. One is what I believe is very clear and easy – I do X activity, and I get this financial gain. It’s very clear. I work with a lot of real estate professionals in the retail market; I tell one story in the book about my client Charles, who compressed a year’s worth of sales into one quarter. We did that by first looking at what his toxins were, and then identifying what his high ROT activities were.

His high ROT activities were really simple. He told me this from the very beginning, “ten by ten.” Ten contacts by ten AM. Then we expanded that. So that was his highest return on time; when he reached out to potential customers and past customers that were looking to buy or sell their home, his time investment went to the next level, and so did his performance.

The second ROT for him was looking for pocket listings that weren’t on the market, where he had qualified buyers. He wasn’t spending that time doing that. So those were two areas for him that once we got rid of the contamination that was taking the rest of his time away from him, he was absolutely able to focus, and he just crushed that quarter. So we need to look at investment of time/financial return.

Secondly, the other part is our felt sense of connection and purpose. What are the things that we’re doing in our life that makes us feel that we’re connecting to our talents and our gifts, and we’re making connection? Those are two areas to look at when we look at high ROT activities.

I just recently did a TV interview (yesterday, actually) and part of this was looking at, well, what are we using time for? And I said in the interview that time ultimately is for one thing, and that’s to create memories that matter, that become our legacy. So these are a couple metrics on how we determine what are those high ROT activities.

Joe Fairless: Yeah, I love your quote. Did you come up with it on the spot during the interview?

Steven Griffith: No, that’s something that has been in my mission from the very beginning on this.

Joe Fairless: Yeah, it’s powerful. I volunteer with hospice, and when I work with patients there it’s all about the memories; they’ve got a couple weeks, or a month or so to live, and it’s all about the memories that they have, the positive experiences; those are what they talk about during their last weeks and months. It’s not about the other things, whatever else there is in life; it’s all about those meaningful memories.

Anything else that we haven’t discussed as it relates to your book, The Time Cleanse, that you think it would be beneficial to discuss during our conversation?

Steven Griffith: Well, I think one of the things that we really wanna be clear on is when we’re looking at ROT, things that are compounding our time. So there’s two things when we look at our time, what I call “time hangover activities.” Being around people or activities that create a hangover. This is a big thing, Joe, when we look at how we’re using our time.

If you’re around somebody that’s negative, or you’re doing activities that are really not high-return on your time, there’s an emotional cost to that, and that becomes a hangover. The same thing when you go out and someone’s drinking – they have a great time, and then they pay the price the next day and the next couple days. It’s the same thing with what I call a time hangover – when you’re using that time ineffectively, or investing it in the wrong way, with a poor return. It carries over for many hours after that initial time.

The flipside is the compounding effect; it’s like compounding interest. We use the fitness as an example – when we’re investing the right time at the gym, we’re getting in shape, we get more energy, and now we’ve got more energy and vitality for our kids and our family and our business. So we wanna really look at using our time in a way that compounds it, and that we’re not letting these toxic things that I’m talking about get in the way.

Joe Fairless: Any suggestions for how to do that?

Steven Griffith: When you say “how”, how exactly are you asking?

Joe Fairless: Well, like to make sure that those time hangover activities – we’re going about it the right way; a practical next step…

Steven Griffith: Yeah, it goes back to really looking at the activities and saying “Is this contributing or contaminating?” I have an assistant that does a lot of my errands. If I’m caught doing errands (dry cleaning, follow-up on certain tasks in the office), I don’t like doing that. I get agitated. So now I’m gonna go speak or work with a client – there’s a hangover there.

Joe Fairless: Okay. That makes sense, thank you.

Steven Griffith: And the other one major thing that I’d love to share here with you and your listeners is this – taking control of your phone. This is a piece of advice that will get back hundreds of hours…

Joe Fairless: Please help me with this personally. I need help. I’m on the couch right now with you, so please help me.

Steven Griffith: Alright, so here it is… We’re gonna go through a time cleanse of your phone, alright? So the phone — there was a piece of research that I put in the book that they monitor people for one week, to see how much interaction they had with the phone. The average person touched/clicked/swiped/looked/felt the phone 2,600 a day.

Joe Fairless: Wow.

Steven Griffith: 2,600 times. That’s about four hours of interaction with the phone. So here’s the deal… You heard me use the word “timefulness” previously, and it’s really about mindfulness; mindfulness is a bit part of this system – that really means being present in the moment. Present in the moment, right now.

So when we go to our phone, we wanna be in charge of the phone. Our phones right now are designed to take our thoughts and actions over. They have neuroscientists working on this around the clock to get us connected to the phone longer. So here’s a couple hacks, my time cleanse of the phone…

The first thing you do is you grayscale your phone. There’s a feature on your phone where you turn your phone from color to black and white. Why do we do that? It makes the phone less charming. It’s like Disneyland, that phone; when you turn it on and those colors come on, it’s Disneyland. “What ride am I gonna get on”, right? So we first grayscale it.

Number two, we remove all apps to the second screen. When you turn the phone on or you look at your phone, there’s nothing in front of you, except whatever picture you have there, screen saver…

And then the third thing is we turn all notifications off. All your dings, clings, flashes, notifications of text and e-mail. And here’s why we do that – it’s training your brain not to be present, and it’s distracting you. So when you go to your phone, now you’re in charge of what you wanna do with your phone; not having your phone in charge of what it’s gonna do with you.

Joe Fairless: Love it. Thank you for that. I’m personally telling you thank you… And I know that will be beneficial for other Best Ever listeners. I will be doing every one of those three things. Notifications will be tough, because I play chess with friends, against my wife, and we always go back and forth during the day… But I will do that for seven days. All three things for seven days, and then I will decide which ones I wanna continue to adopt… But thank you for that.

Steven Griffith: Great, great.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Steven Griffith: Well, a couple things. I’ve got a couple special things for your listeners. It’s StevenGriffith.com/bestever – there’s a free download there with ten tools and tactics, my best tips to get back your time and perform with it. Then for your listeners that order the book, the same URL, they’ll get a free masterclass; eight videos, I take them step by step through the whole time cleanse process to get back their time, and then show them how to actually perform at a higher level with it… So those are two giveaways for you guys.

Joe Fairless: Outstanding. I just clicked it, and I am signing into Amazon to purchase the book right now. Checking out, placed order, done. I just bought it.

Hey, I really enjoyed our conversation, and some very practical pieces of advice… I already mentioned my affinity towards your three time cleanse tips for the phone, as well as just the overall approach for being focused on certain activities that you are intentionally focused on, versus trying to accomplish a whole bunch of stuff where most of that bunch of stuff isn’t necessarily moving you towards fulfillment and your bottom line, because you’re not being intentional about the process.

Thank you so much for being on the show. I hope you have a best ever weekend, and we’ll talk to you again soon.

At a very young age Igor has figured out how to build a consistent and profitable house flipping business. Not only has he been exceptional at networking and establishing advantageous business relationships, his business is structured smartly and his team is performing very well. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Igor Kajpust. How are you doing, Igor?

Igor Kajpust: Good, good, Joe. Glad to be on here with you.

Joe Fairless: Yeah, nice to have you on the show. Igor is a 22-year-old full-time investor specializing in flips. He purchased 8.5 million dollars of flips in 2018. That was 35 deals. He sold 20 of them last year for 1.15 million dollar profit, and has 1.25 million in equity in the remaining 15 of them. His goal is to do 500 in 2019. Based in Los Angeles, he invests in other markets – we’re gonna talk all about it. Igor, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Igor Kajpust: Yeah, totally, Joe. I’m predominantly a fix and flipper. The majority of our business is in Orlando, Florida and Denver, Colorado, both markets that I’m pretty familiar with. I spent about three years in Denver before moving out here to L.A, and built up the business there. My partner is based in Orlando. We’ve got a little bit of a team in both of those markets, so we really just focus on acquiring and flipping as many of those single-families as we can in those two markets, kind of with a systemized approach.

A little bit of background – I’ve been really interested in real estate ever since I can remember, and I was always trying to make money, and buy and sell stuff here and there… I ended up buying my first piece of property when I was 17, when I was in high school; it was a $750 vacant lot somewhere, that I still have… And since then, I’ve been really interested in real estate, and have been learning and learning as much as I can along the way.

I went full-time when I was 19, doing wholesaling at the time and really sharpening my skills on the off-market acquisition side of things during the last couple of years. More recently, all of last year I decided to actually close on and flip most of our deals, rather than wholesaling them. That’s the approach we’re taking on going forward, and just raising more funds and closing on everything that we can and capitalizing on all those opportunities.

Joe Fairless: Where did you get the money to purchase 8.5 million of flips?

Igor Kajpust: So 8.5 million is the retail value. It was about 5-6 million dollars of equity. That was all just private money, essentially, at hard money terms, through networking, introductions from different people to their lenders, and just being able to show my track record of wholesale deals that I’ve done the previous couple of years. They were like, “This guy knows how to find a good deal, we’ll give him a shot”, and it’s really grown. Those are five, six different lenders that I use, that basically supply us with all that capital.

Joe Fairless: Okay, so they’re not private individuals — or if they are private individuals, they do this for a living, they lend hard money out for a living?

Igor Kajpust: Yeah, the majority of them. Two or three of them are basically full-time either retired real estate investors that just lend now, or they have a little hard money side to their business… But I would definitely consider them more as private individuals lending at hard money terms, rather than hard money companies.

Joe Fairless: Okay.

Igor Kajpust: So some of them have a full-time job or a business, and they’re just lending to me on the side.

Joe Fairless: What are the typical terms?

Igor Kajpust: It’s pretty much two points and 12% across the board that I pay, and then they get their first position lien.

Joe Fairless: Okay. And something you said is they look at your track record for when you were wholesaling, and you were able to find a good deal – how do you find good deals?

Igor Kajpust: It changed over the years, but really the strategy that’s worked best for us and that we’ve doubled down on over the last year and a half has been cold calling, and more specifically cold calling on a targeted list… Cold-calling pre-foreclosures, tax defaults, probates, those more targeted lists, as well as — we also have a blanket approach too when we run out of those lists, but the strategy we’ve really seen the most success with has been cold calling. We’ve done some PPC and online stuff in the past, but cold calling has been what’s really been best for us.

Joe Fairless: And where do you get your lists?

Igor Kajpust: The majority of this stuff comes directly from the county. In all of our Colorado stuff it’s really easy; the deed of trust states — so we reach out to the public trustee, or access their portal online, and they’ve got all that information beautifully organized, with how much the people owe, how long they’ve been in default, name, address… Everything you really need, it’s just neatly organized for you online. So a lot of that information – there are different departments for it in different cities and counties, but a lot of it is available just through the local governments.

Joe Fairless: Same with Orlando?

Igor Kajpust: Yeah. Orlando, actually we used to scrape it manually off of there. It’s the same way, but Orlando is judicial — not to get into too complicated kind of stuff, but it’s a judicial foreclosure process, so you’re kind of scraping through court cases, and stuff, and it’s a lot harder to see the information. We use different list providers in Orland that kind of put all that information together, and then we just pay them for that service.

Joe Fairless: And how much do you spend annually on the cold calling tactic? …which includes the team, the list and all that.

Igor Kajpust: Essentially, how we structure it is we basically pay our guys commission-only. It comes out to $3,000 upfront for each deal that they get, and that’s distributed amongst maybe a caller, or someone that went on the appointment; they might each get $1,500 or whatever the case is, and then they get a bonus on the back-end, depending on what our net profit is on the deal; they get a 5% to 10% bonus of the net on that deal. I’ve got 19-year-old guys in the office that got a $15,000 check as their bonus off of that net.

Joe Fairless: That would buy a whole lot of $750 vacant lots.

Igor Kajpust: [laughs] It sure would, but they like to spend it on freakin’ Gucci shoes.

Joe Fairless: Oh, no…! You’ve gotta have a word with them.

Igor Kajpust: [laughs] Oh, they’re learning, slowly but surely.

Joe Fairless: That $750 vacant lot that you bought when you were 17 years old – what is it worth now, if anything?

Igor Kajpust: It’d probably be tough to find a buyer for it. It’s maybe a grand or two. It’s out in the desert in Colorado somewhere, with no roads or anything.

Joe Fairless: How did you come across it if you weren’t living next to it?

Igor Kajpust: It was actually a website I found on my crazy googling and researching I was doing when I was just super-obsessed with the idea of investing in real estate, and I found that website, which I don’t know that I’d recommend using, but it’s called bid4assets.com. Have you ever heard of it?

Joe Fairless: Bid4assets.com?

Igor Kajpust: Yeah.

Joe Fairless: No, I have not heard of it.

Igor Kajpust: I stumbled upon that and I just saw “One dollar, no reserve, vacant land”, and I was like “Oh, wow… Is that like $100? Awesome!” and I ended up winning the bid. I was hanging out with my friends in my room, senior year of high school, and I’m like “Dude, you guys, I’m gonna totally buy this land!” [laughs] That was the first one, and I ended up buying another property off bid4assets.com, which was my second deal a couple months later, with a friend. We threw in a couple thousand bucks each and bought a property in Indianapolis from a bank, for $7,500, through the website.

At the time I didn’t know what a quitclaim deed was, so we ended up buying this property, and we go to sell it and find out there’s $14,000 of liens on the thing. [laughs]

Joe Fairless: Aww….!

Igor Kajpust: Yes. So needless to say, we learned a lot with that experience, and I haven’t been back on bid4assets.com since then.

Joe Fairless: What happened?

Igor Kajpust: We put it back on the market, because we thought we were gonna fix it up. We were like, “Oh, it’s just gonna need some cabinets and some paint”, just based on the pictures; we never looked at it, or anything. And then I ended up taking a drive out there and it needed a lot more than some paint and some cabinets… [laughs] So we put that on Craigslist; it took months, we weren’t getting any action. We listed it with an agent, he got a buyer for $12,900 or something. We were super-excited. We got the settlement statement, and it was like “You guys need to bring 3k to the table”, or something. I was like, “What…!?” [laughs] But then we ended up finding some investor that was willing to take it subject to the liens for $8,000 and we basically got out of it, by the skin of our teeth.

Looking back now, I would have probably been able to — the municipal liens on there, we could have negotiated those liens, [unintelligible [00:10:23].06] and probably done a little better, but you kind of learn as you go.

Joe Fairless: Yes, you do. Thank you for telling that story. So your profit that I read in your bio was 1.15 million – does that factor in the commissions that you’re paying out to your people and whatever expenses you have, overhead for your company?

Igor Kajpust: No, that’s just the gross profit that’s basically what we got back from all the closings, after having paid for whatever expenses we incurred…

Joe Fairless: Sure.

Igor Kajpust: …dialers, or any expenses. So essentially that’s just the gross. The net is a couple hundred thousand dollars less, and then we’ve got that remaining 1.25 million that’s just properties that are getting wrapped up now, or on the market now, or under contract… I actually just had a closing today, so we’re selling off the rest of that stuff. It’s scheduled to close the next month or two here.

Joe Fairless: That’s great. So who’s leading the charge here? Is it you and a business partner? It sounds like you have a business partner.

Igor Kajpust: Yes. Me and my business partner are both 22 years old, and we met at Sean Terry’s Flip2Freedom conference a couple years back, and just started working together at that point. Now he runs pretty much the majority of the day-to-day out of Florida. Now that I moved to L.A, Denver reports to Florida, and he kind of oversees the majority of the day-to-day, and I help with business development strategy and raising money for all of our deals.

Joe Fairless: And you mentioned the net profit was a couple hundred thousand dollars less than the 1.15, which is still relatively speaking a whole lot of money… So what is that – like 850k, 900k. Is that just money that you and your business partner split 50/50 and you go buy some Gucci shoes, or what do you do with that 900k?

Igor Kajpust: [laughs] No, we’re reinvesting the majority of all that into the business. We basically had it structured in a way while I was running the Denver office and he was running the Orlando office, where we were getting a larger or smaller share of the profits based on our office’s performance. So it wasn’t an exact 50/50 split.

But we’re basically reinvesting the majority of that money. We’re looking to do some rental portfolios right now, and just testing some strategies, keep buying deals and keep growing the business. So no more Gucci shoes for me.

Joe Fairless: And the 1.25 million in equity that you have remaining in the 15 homes – those are homes that you’re selling, you just have that spread based on what you put into it and what it’s valued at currently… Is that correct?

Igor Kajpust: Exactly. That will come out to another 800k-900k in net profit after commissions and expenses once all that stuff is sold.

Joe Fairless: And with your fix and flip business – why did you choose to go from wholesaling to fix and flips?

Igor Kajpust: We just really wanted to get more into the ownership side of the business, not just assigning the paper and getting a small fee, basically. My long-term goal is turning hundreds (if not thousands) of single-family homes, large portfolios, and wheeling and dealing with the hedge funds, and that’s kind of just what I’m working towards. I feel like that was a step in that direction, and being able to secure our own financing, get the deals funded, close on them… We have to improve the properties… So we see them as just getting us ready for the next steps that we wanna take, and teaching us the necessary skills to get there.

Joe Fairless: And what’s the long-term vision with the hedge funds and the portfolios of single-family homes?

Igor Kajpust: We just wanna keep growing our acquisition systems and growing the business to be able to acquire hundreds and hundreds and thousands of single-family homes, creating rental portofolios, doing huge volumes of fix and flips, and just dealing in much larger volume with single-families.

Joe Fairless: So in that example, let’s say you came across a 500 single-family home portfolio, and they are distressed properties; your vision is to be able to buy those 500 single-family homes, fix them all up, and then sell them to someone, or a group…?

Igor Kajpust: Yeah, or acquiring 30-40 a month for a year, just through our call center, putting tenants in place, and then selling that portfolio to a fund for 25 million, or whatever the case may be, as like a performing package.

Joe Fairless: Okay. And with your deals that you sold last year – you sold 20 of them – I’ve heard some fix and flippers say that their approach is for every 2-3 homes that they sell, they keep one in their portfolio… That way, they’re not just constantly having to churn our deal after deal; they’re actually making some residual income, so they’re not chasing the next deal. What’s your thought process on that?

Igor Kajpust: I think that that’s a great approach. Personally, the market has just been too tempting to sell the last few months, the last year or two… I mean, when you’re getting 15 offers over the weekend and they’re all 20k-30k over ask, it’s hard to keep them. So my strategy is the next downward cycle that we have, as the market is slowing down here, and we expect the market to cool down – it’s already cooling down in certain areas, but it’s expected to cool down more over the next couple years… At that point, I wanna just raise a bunch of money and create rental portfolios then, rather than buying all this stuff at the top of the market. Just buying a couple for my personal portfolio and keeping them.

I’m still a young guy, so I’m kind of out there, willing to take the risk and go bigger, rather than thinking in the long-term… Although I know it’s beneficial to think in the long-term, but I’m a little more hungry for risk right now.

Joe Fairless: Yeah, the market has been very favorable to what you’re doing, but people have lost money even during favorable times, and you have made money… Certainly, the market helps, but you have to have a system in order to actually make money, otherwise you could lose money in a good market. You mentioned that getting 15 offers over asking during the weekend – how can you really turn that down, and I totally get that… So my question is “What is your approach when you’re fixing up a property? Actually, I’ll be more specific. When you’re pricing a property, prior to listing it, what is your approach to get the maximum price?

Igor Kajpust: Honestly, we didn’t even have too much of an approach, especially in Denver, which has just been an insane market. We hardly staged any of the properties. It would literally be like asking our agent what they think we should list it for, do a little bit of our own research, looking at comps on the MLS, put it within 5k-10k or the same of what other stuff is selling for in the area. Then we’d put it on the market, and then we’d end up still selling it for 20k more than we listed it for.

Denver over the summer was like a month’s supply of single-family, the price range that we were in, so everything would sell so quickly. It was crazy.

So basically we’d just look at the comparables, talk with our agents and see what they think, and just go with that.

Joe Fairless: And how do you determine what type of renovations you do at a property?

Igor Kajpust: Again, looking at the comparables. In some of the properties on the lower end we would be putting just cheap Home Depot countertops, cabinets, not even granite, and stuff would sell really well. On the slightly more expensive ones, if everything else in the neighborhood is at 350k and it’s demanding granite countertops and [unintelligible [00:17:46].23] shower, then we would put that, what it was selling for in the area.

Joe Fairless: How do you determine what your comparables are?

Igor Kajpust: Just the basic rundown of comparable single-family homes, looking at whether it’s the same style of home, if it’s a ranch home, split-level, bedroom/bathroom count, square footage, look at the street view, or look at the street in real life to make sure that it’s a similar neighborhood, similar vibe. Then the finishes – like I said, if the kitchen’s got granite, if it’s got hardwood floors, if it’s got [unintelligible [00:18:16].02] we would just try to mimic the other stuff in the neighborhood that it’s comparable to, so it’d look similar.

Joe Fairless: You did 35 flip deals last year… Which one made you the least money or lost you money?

Igor Kajpust: Okay, good question. There’s actually one that lost me about $10,000, on which my lender made like $25,000… [laughter] Basically, just the quick story of the deal – we ended up buying it, it was already a little bit slim; we bought it at probably 80%, expecting it to be a quick flip. The guy ended up not moving out. We didn’t do a holdback, so he stayed for an extra three months; we had to pay him an extra $2,5000 to get him out. My interest payment on that — it was a 275k purchase, so it was a $2,700 interest payment, and I had to pay that for 3-4 months.

We ended up doing a six-month hold all-in, costing us a bunch of holding costs, some fix-up, and then we sold it for 340k and lost 10k.

Joe Fairless: Having the circumstances presented to you in a similar deal in the future, what would you do differently to mitigate that risk?

Igor Kajpust: Oh man, the holdback. The biggest thing is if there’s a tenant or a homeowner that’s living in the house and they wanna stay after closing, that’s fine, but hold back some of their money. So if they’re getting 30k in proceeds or 50k in proceeds, holding back 5k or 10k of that for when they move out, so you ensure that they move out. It goes off without a hitch, and then you just pay them that 5k or 10k. It’s held in escrow by the title company, so as soon as they move out, they can get that money. That would have saved us on that deal and we would have ended up making some money, rather than losing a little bit.

Joe Fairless: What’s your best real estate investing advice ever?

Igor Kajpust: Staying consistent, especially for a lot of the newer people out there. I didn’t get my first deal for 6-7 months. I know a lot of people that are now successful in the business that didn’t get their first deal, they didn’t get any traction for a long time, and it could be very discouraging to keep running into a wall, and not being able to find a solution… But if you stick with it, put in the work, 9 times out of 10 you’ll be able to punch through and succeed.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Igor Kajpust: I made $140,000 profit in about four months, on a single-family flip.

Joe Fairless: Was that flip through the calling?

Igor Kajpust: Yeah, that was a pre-foreclosure lead. We got it for 160k-165k, put a little bit of money into it and sold it for 355k. And I actually had no money — I’ve had probably like 5k into that deal. Because it was so cheap, my lender lent 100% of the money that we needed.

Joe Fairless: Best ever way you like to give back?

Igor Kajpust: Honestly, I like giving back to homeless people. Whenever I’m driving by, and they’ve got their sign out, and I give them $50, and $20, and they get so happy that it actually makes me feel good inside, and I give them a hug… I like to do that.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Igor Kajpust: Just follow me on Instagram, @whoiskaj, and check out my website, evolvepj.com, or amoove.com.

Joe Fairless: And we have that in the show notes. Igor, thank you so much for being on the show, talking about how your business does deals across a couple markets that you don’t live in, so how you structure that with your business partner, how you get the deals, and that was the challenge, I imagine, last year – finding the deals; because once you found the deal, you have the operations in place, but then you’ve also got a pretty friendly market, too… So it’s really just about finding the deals. And how you do that? Cold calling a targeted list of pre-foreclosures and tax probates… And deals that didn’t work out, as well as deals that did work out.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Growing up, Pete watched his Grandma own a lot of real estate and seemingly do whatever she wanted to do. He set goals to be the same way when he grew up. As life so often does, Pete was thrown some curveballs. He found himself homeless, joined the Navy, and then started working on a fund and platform that allowed anyone to invest in real estate and reap the benefits. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Pete Asmus. How are you doing, Pete?

Pete Asmus: Man, I am doing so good. How are you doing, Joe?

Joe Fairless: I’m doing very well, too. Nice to have you on the show, looking forward to it. A little bit about Pete – he is a high-performance real estate investor with a passion for creating smart investment opportunities for anyone, no matter their financial status. He raised over ten million dollars last year for high-end flips and small business startups. Based in L.A. With that being said, Pete, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Pete Asmus: Yeah. You know, when it gets into real estate – I’ve loved it for years. My grandma, when I go back to when I was a kid, looking at everybody growing up, I always wanted to be like my grandma. She owned every house around her, she owned commercial real estate… It just seemed like she could do whatever she wanted, and I remembered always wanting to have that goal, of reaching that level. Then I had bad things happen, I ended up being homeless, and as I came out of that, I joined the Navy, and through all of it I realized that I had to count on me, focus on what I could do. And I remembered my grandma, and I remember thinking I wanted to create eventually a platform that anyone could invest in, even that 18-year-old kid that didn’t know what he was doing. That’s really what we’ve created with Alchemy Kings. It’s a regulation A+ fund, and it’s focused on the best and most lucrative aspect of commercial real estate right now.

Joe Fairless: What is a regulation A+ fund exactly?

Pete Asmus: What that means is that we can go and — it’s for non-accredited investors. There’s a difference — back in the 1930’s when the stock market crashed, the government wanted to step in and start dictating “Well, this person can invest and do what they want, but this person we’re gonna watch out for.” And what we created was a platform that all of those people could invest in.

Joe Fairless: So it’s a public platform that anyone — and I’m about to put words in your mouth, so please correct me, what part I’m right and wrong…

Pete Asmus: Okay.

Joe Fairless: So it’s a public platform where anyone can go to your website and then invest via their computer, remotely, and into projects that you’re participating in – is that accurate?

Pete Asmus: Yeah. Think of a pre-IPO. That’s really what we’ve created. So you’re buying shares within the company, and as the company performs well, then you’re gonna get dividends, and our whole goal is to go public… But the bigger picture for me — not only is it a platform that anybody can invest in, but really how we shifted our focus. We own the largest real estate groups on LinkedIn. We have over 1.1 million members on there. So when it goes to looking at strategies that are out there, we wanted to find the best strategy possible, and we found the strategy of our lifetime, period. There’s nothing that can touch this. The only thing that comes close to the returns that we’re looking at in this industry is gambling, because when you look at what cannabis is starting to do across the united states, it really is like a green rush, California being the fifth largest economy in the world, legalized it a year ago, and it’s looking at — I don’t know if all the numbers are in, but it’ll be in the billions.

Overall, nationwide, we’re looking at about a six billion dollar industry, that’s legal; we’re looking at a 40 to 100 million dollar industry that is still illegal. As the federal government goes on, you’re looking at almost an 85% to 90% growth rate that’s gonna happen within the next five years.

Joe Fairless: Just to clarify – when someone invests in Alchemy Kings, they’re buying shares in your company, and then your company invests into other ventures, businesses, real estate or whatever. Then as those profits from those investments go, so do the shares of whatever the company is worth. Is that how the business works?

Pete Asmus: Yes, exactly.

Joe Fairless: Got it. So the types of businesses that you invest in – clearly, one is cannabis, because you’ve just mentioned that…

Pete Asmus: Well, it’s not cannabis. See, that’s the beauty of it.

Joe Fairless: Oh, okay. Alright, so what are you all investing in?

Pete Asmus: We looked at what were the golden shovels of the cannabis industry. Because when you look at prohibition — this is a product that was outlawed for over 80 years, and has grown exponentially. You’ve got over 250% usage has increased in 65 and over. You’ve got senior citizens that are turning 55, 10,000 of them a day, and that’s a quote that I know just from assisted living facilities, but the reality is all of those people also are taking a lot of medications, and now they’re starting to shift from wanting to take pills and things that are very addictive, to things that are more holistic, if you will. So your usage is up by 250%.

They did a study on some seniors, and 95% of them saw a 50% reduction in pain. The reason I’m sharing this is because it’s these personal stories that really starts to open up the conversation and start to make people realize that 1) cannabis is coming, and there’s really no stopping it. It’s on its way. So we look at it like the gold rush. And in the gold rush, the people that were making all the money weren’t the people looking for the gold. They were the people selling the shovels. So for us, it was “What are the golden shovels of this industry?” And there were two.

One, in order to get a license, you must have real estate. You have to. It’s the cornerstone of that industry. Because you can’t just grow this in your car or somewhere random. They wanna be able to come in and verify that everything is going according to plan, that you’re paying your taxes, that the permits are right… So it has to be associated with a piece of real estate, and it has to have a CUP (conditional use permit) allowed for that, on that specific land. In California, only 18% of the municipalities allow that, and you’ve got 57% of the raw land sold for cannabis was in Coachella Valley, which is basically Palm Springs to Indio.

So you have this little, tiny section of California that is really gonna become the heartbeat of California. Does that make sense?

Joe Fairless: Yeah, it does.

Pete Asmus: So we looked at it from that standpoint, and we were like, “Okay, so we’re gonna take on real estate.” It’s a way for us to get into the boom without getting into the business. We don’t wanna touch the plant, we wanna be able to talk to Wall-Street, we wanna be able to do other things, and we have a regulation deed that we did that with – purchase the land, we have 8,5 acres, and we’re building out 162,000 square feet. We literally just talked to the city and they wanted us to add a few more spaces, and what they said we could do is lift the other four buildings up and park under one of them, so we’re looking at that option, and that could add another 50,000 square feet to this development.

Joe Fairless: What are you developing?

Pete Asmus: We’re developing — basically, what they are is industrial condos. If you think of a condominium complex, we’re doing the same thing but we’re making them industrial condos. So they’ll be in 3,000 square foot increments, you’ve got a few buildings (like I said) that are two-story, but the key to the 3,000 square foot increment is this – in order to get a license for growing in California… You have three licenses – you have a 5,000, a 10,000 and a 20,000 square foot license. They all need at least 10%-20% of overage for office space. So the reason we sold 3,000 square foot increments is because that gives them that 20% overage; all they do is they buy two if they want five, they buy four if they want ten, and so on. It allows them the flexibility to grow over time as well, and it gives more people the opportunity to get involved.

When you look at the statistics, 55% of cultivators are actually mom and pop organizations earning less than $500,000/year, so they can’t afford a ten million dollar development to create a space for them to be able to grow in. Does that make sense?

Joe Fairless: Yup.

Pete Asmus: Alright. So we’ve talked a little bit about the first shovel, which is real estate, because it’s something that is required by law, period. You have to have it. The second requirement is testing labs. We’re focused on building out testing labs and becoming the largest testing lab for cannabis in America, and here’s why – there is a huge vacuum. Until 2018, California didn’t have anybody testing cannabis. You can’t test cannabis and anything else. So you’re left in this real juxtaposition, because not only can you not test anything else, you can’t do anything else in the cannabis industry. So if you’re a testing lab, you cannot grow, you can’t manufacture, you can’t create inedible, you can’t test water, unless you bought double the machinery. So what it does is some people have converted to cannabis because there’s a higher profit margin in it and they’re believing in it.

Obviously, if you were to become a testing lab back in January, it would have been a lot (if you will) sketchier than it is now. There weren’t any banks back then that were allowing the use of a cannabis fund, so you had people walking literally hundreds of thousands of dollars into a bank, and they permeated of cannabis. That money smells like weed for weeks. It’s insane, and I’m not even kidding. I took my camera bag into a grow one time, and when I got out it took me about a week and a half to get the smell. Everytime I opened up the camera bag, it smelled like I was growing weed in my camera bag. It was the craziest thing.

But when you looked at the testing labs, we realized — we had been talking to a few different people, and our goal was we were gonna do everything. We were gonna grow, we were gonna manufacture, we wanted the brands, we wanted that part of it. And when we talked to the third dispensary that had to throw product away in June, we realized that the biggest hole was in testing labs, and that it was the least risk out of all of them, too. We wanted to be very risk-averse. So when we look at the testing lab park, anybody that converted from normal testing to cannabis, left a hole in normal testing. Anybody that was coming on to test cannabis was brand new, and there weren’t very many at all.

So by us coming into this space, we had, if you will, a plan B. If cannabis were to go sideways, we still could test water, we could test other plants, we could test agriculture… If cannabis goes sideways, we could still own the real estate, we could convert it into different types of commercial real estate; it’s still industrial condominiums… So there’s a lot of different things that could happen, it wouldn’t just be done, like if you were having a commercial kitchen, or if you had a commercial grow operation, or manufacture, where there’s nothing else you can really do with the product once it’s been contaminated, if you will, with cannabis. Does that make sense?

Joe Fairless: Multiple exit strategies.

Pete Asmus: Yeah, exactly. Exactly.

Joe Fairless: With the testing labs you said your goal is to become the largest testing labs for cannabis in America. How many testing labs do you have as of today?

Pete Asmus: SEC just approved our fund, so we’re in the very first round, which will be starting on January 20th; we’ll start the first round of funding. So we don’t have any testing labs yet. What we’ve done is — I think we have three different testing labs that we have talked to and are working with on working on a deal to basically build out a franchise. My partner and I aren’t chemists (we understand that part of it), but we’re very good team makers. So for us it’s just about managing the team, making sure that the right people are in the right position. Me being in the top position of a laboratory is not the right position for me, because that’s not what I do. But hiring, or becoming a franchisee and having somebody else hire again the right person for the job, then that puts us in the right position. We can still run the company, we can still make sure that everything’s happening according to plan, but when it comes to the whole organization of it, we wanna make sure that we’ve got a solid system that’s already proven.

Joe Fairless: For Alchemy Kings – are these two ventures within the cannabis industry the only way that you all are planning on making money? Because you mentioned you own the largest real estate group on LinkedIn, 1.1 million members. When I introduced you during this interview, in your bio it says you raised 10 million last year for high-end flips and business startups, so I’m wondering is this going to be a combination of all that, or is this just laser-focused on these two things?

Pete Asmus: Yeah, we have shifted all of our focus. We basically stopped doing everything on businesses. The businesses shifted to cannabis, so that’s what we’re focused on – laboratories. That’s what we wanna invest in – companies that are thriving, that need capital for growth, and that wanna open up a second location that we can work out a good arrangement with.

The second part of that is when you talk about the LinkedIn group and all the members, there’s various things that we can do with that, but when it comes down to flipping high-end homes, we don’t wanna get caught in any of the downtrend that could happen come the next few years, when we know for a fact that cannabis will be on the rise for the next 5 to 8. So we just shifted everything into what we saw… Now, you could say that it’s a bubble; eventually, it’s going to hit fruition and it’s going to start coming back down. But right now, when we know exactly what’s going to happen — we know that the government is talking about legalizing it, we know that Trump is looking at putting that on his agenda, and I’m assuming it’s going to be one of the key running marks of the presidency. However, you’ve got Democrats right now that just took over that wanna try and federally legalize it prior to that, so it doesn’t become part of that, because I think Trump is gonna wanna make that part of his legacy… Because cannabis by 2028 will be the largest single contributor to our economy, period. Hands down. Here’s why.

When you look at Desert Hot Springs right now, 800 acres out there is being developed. Now, that sounds like a lot, but it’s only 4% of what’s needed for California’s raw land being converted. It’s only 4%. So it’s a drop in the bucket to what we need currently, and that’s not including — as we start to take over the black market, that number is gonna go up. So when you look at that, and now you’ve gotta talk about “Alright, great, you’re developing 800 acres. Well, what does that really mean?” What that really means is there’s zero infrastructure out there right now. There aren’t nice houses that people making over $100,000 are gonna want to live in, and you’ve gotta look at who’s going to be moving in.

You’re not gonna be having a lot of middle-aged people taking on this category; you’re gonna have a lot of younger people that have gone to college now, so you’re talking millennials. Millennials like different things when it comes to housing. So an apartment building or a condo building would be very good out there. You’re looking at a lot of infrastructure that needs to be built out in Desert Hot Springs, not just cannabis-related, but all related to the cannabis industry. Does that make sense?

Joe Fairless: With the eight acres that you mentioned earlier that you’ve got, how did you acquire that if the SEC just approved the fund?

Pete Asmus: That was acquired with our Regulation D fund.

Joe Fairless: Okay, got it. So how does that work? Does Regulation D lead into A? Will you just educate us on that one?

Pete Asmus: Yes, one of the things that I wanted to do with the A was I wanted to allow it to basically come in at the last minute and do the funding of the regulation D’s construction budget. So knowing that we’ve already got people that wanna buy the properties and we’re in a really good position, that ends up getting a really good return for that regulation A right off the bat, getting into a great deal at the last minute. So one of the things that I wanted to do with that was be able to lend.

The other aspect of it is keeping them completely separate, the regulation A can still go out and we can buy pieces of land and basically duplicate the same process that the regulation D is doing. So the whole point of the D is to give an example of what the results could be. On that fund alone, when we’re talking about the 8,5 acres, we’re building out ten buildings. Eight of them are gonna be sold, two of them we’re gonna be holding. We do have three companies that wanna buy the entire development, and if that happens, then obviously we won’t be holding anything. But just based on us holding two of them, we’ve got a great ROI already intact.

So you’ve got condos that are happening, you’ve got multiple exit strategies, and you’ve got an industry right now that is basically begging for property. The whole reason we found this property, which is really what I wanted to share with you, because I thought that’s where you were going, was we were about to buy two buildings in property directly South of it. When we put the money together to buy those buildings, basically they ended up selling them before we could do it, and it was within 3-4 weeks. And I was like “Wait a second, man… You guys have raw land, right?” “Yup, raw land.” And I’m like, “You just pre-sold your entire development?” “Yup, pre-sold our entire development.” “So you don’t have anything left.” “Nope.” I’m like, “This is crazy.” So I go “Okay, well then this is what we need to get into”, because if they’re able to pre-sell an entire development, you mitigate so much risk, and you’re getting 25% down.

When we started doing all the numbers, we’re basically at a 30% build rate to a 25% deposit rate, so we’re only really being exposed about 5%, which isn’t bad at all. Not including the fact that we’ve got about 30 people that already wanna lease the properties and we now have an investor that is coming in that wants to change it up slightly and wants us to hold it; because if we hold it for the next 2-3 years, it becomes federally legal. Now, once it’s federally legal, we can sell these at a better cap rate. And if we’re only at an 8 or a 10 cap rate, we’re looking at a 40 to 50 million dollar sale price. So it just makes sense, and it’s (again) the best opportunity that we’ll ever have in our life. Never again will they schedule one drug becoming off of that — nobody’s ever gonna say that any of those other drugs are good for you. Cocaine – no, it’s just not gonna happen. So we’ve got this small opportunity, because once it becomes federally legal, then private investors lose out, because now as a developer I can go get a traditional loan, I don’t have to go to private investors to raise money.

Joe Fairless: Taking a giant step back, based on your experience as an entrepreneur and real estate investor, what is your best advice ever for real estate investors?

Pete Asmus: Coaches and mentors. Gene Guarino is probably one of the greatest mentors I’ve ever had. I literally try to copy everything that he does, because he’s just a brilliant guy, and if you’ve ever heard him talk, he sounds just like a Bible school teacher. It’s just — man, the way he talks, and… I love that guy. And he’s always got great advice. Whenever I’m stuck, whenever I’m feeling like “Oh, what should I do…?”, he’s always a text away… And I think that having great mentors, having great coaches, and really having people that you can rely on is a big part of your success overall.

Joe Fairless: Coincidentally, Gene is going to be speaking at my conference in Denver, on the 22nd-23rd of February. So you can go to besteverconference.com and get your ticket and listen to the talk.

Pete Asmus: Man, do that. Go get that, because I promise you, when you hear him talk, it will be well worth your time. He is an amazing speaker. And again, he’s just an amazing guy, so just go hang out with him. We went to his RAL Nat Con and we met the most interesting men in the world, and it was so neat; I was on the outside, I was like “I don’t really need this picture”, and he was like, “No, come on, Pete! Get over here and sit down.” And again, he’s just such a great guy… So yeah, if you guys have the opportunity, make sure you go out and check out Gene at that event. And I think he even usually does an extra day or something, doesn’t he?

Joe Fairless: Yeah, he’s doing something else too, later in the week. That’s on the website too, besteverconference.com. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Joe Fairless: Best ever deal you’ve done that we have not talked about already on this show?

Pete Asmus: A mobile home deal.

Joe Fairless: Why was that the best ever?

Pete Asmus: Because it was super-quick, it was really fast. I went to one mobile home park, and the guy wanted to sell it, but he wanted a smaller mobile home, and I had just been at a different park that had a smaller mobile home. I ran back to the one park, basically secured it, bought it for a grand, and then ended up trading it to him for $10,000 value, and paying another five grand for his, and ended up getting like a $20,000 mobile home for about $6,000. Then I sold that in about two weeks.

It was just such a cool experience, and I was teaching people at the time, so I had a group of students with me and they all got to see it happen. It was just a really neat experience.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Pete Asmus: Trusting too much, and not speaking up when I should have.

Joe Fairless: Will you elaborate?

Pete Asmus: Yeah, I got into a deal where it was somebody I’d known for a long time, and I thought “Well, I’ve known him for a long time, so it must be real”, and it was really just a pipe dream that he had. All the numbers ended up not coming back, so I had to walk away from about 25k, and it was irritating, but it was a lesson learned – no matter how great of a friend they are, I need to make sure that I have the right people inspect the property and make sure that the numbers are what they are prior to getting involved.

Joe Fairless: Best Ever way you like to give back?

Pete Asmus: My daughter has alopecia, so she’s lost all her hair for about four years; it grew back, then it started to fall out again… We’ve become CAP (Children’s Alopecia Project) mentors for Southern California. We go to camps every year, and once a quarter we put on different events at bowling alleys and things to bring the kids together. We wrote a book called Queen Alopecia you can check out at QueenAlopecia.com for free. Just read the story, it’s all about how a monkey loses her hair to find out that it’s what mother nature chooses as her placing stone. It was something that people couldn’t fake, and that’s why Mother Nature made them lose their hair, so that people could see who should lead them. It was just a way to show how differences can make you great.

Joe Fairless: What’s the best way the Best Ever listeners can get in touch with you and learn more about what you’re doing?

Pete Asmus: They can google my name, Pete Asmus. They can also go to PeteAsmus.com, or they can go to greenzone360.com. I’m on Facebook, I’m on YouTube, I’m on everything. Just google my name, and you’ll definitely find me without a problem.

Joe Fairless: You are passionate about what you do, and it shows. I haven’t talked to someone who is doing exactly what you’re doing right now; it’s interesting to learn…

Pete Asmus: Thank you.

Joe Fairless: You’ve certainly had to evolve, or chose to evolve from what you were doing, from high-end flips to this, and certainly some parallels and some commonalities among high-end flips and also other real estate transactions, but it is a new industry… And it’s interesting to hear the different ways you’re looking to mitigate the risk from the investment. That’s what I found most interesting, the different types of exit scenarios and ways you could pivot should the winds shift directions.

Thanks again, Pete, for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

One way to make money in this business is by identifying an emerging market and get in early before everyone else. But how can we find those emerging markets before everyone else? Well Jerry has some ideas and tips for how anyone can do just that. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jerry Chu. How are you doing, Jerry?

Jerry Chu: I’m good, Joe. How are you doing?

Joe Fairless: I’m doing well, and nice to have you on the show. Best Ever listeners, because today is Sunday we’ve got a special segment for you called Skillset Sunday, where you will learn a new skill, or perhaps hone an existing skill, and… Well, today we’re gonna be talking about how to identify the next hot neighborhood.

Jerry, our guest today, has developed multiple trading platforms and he’s actually the founder and creator of Lofty, which uses artificial intelligence to identify neighborhood growth. He’s based in Los Angeles, California.

Before we get into the value proposition of Lofty, Jerry, would you mind telling us a little bit more about yourself, just so we get to know you a little bit better?

Jerry Chu: Sure. I’m originally from Vancouver, Canada. I moved down to Los Angeles to attend USC for my undergrad in mathematics and economics. After I graduated, I did my masters in financial engineering at Claremont. Then I worked on Wall Street for a couple months in financial risk management, and I just kind of didn’t really like the big corporate world; I felt like it wasn’t really for me. My interest was always in technology, so I kind of did a hard pivot, taught myself how to code, and took an internship here in Los Angeles at a tech firm, and then that’s where I met my current co-founder, and we talked about this idea, and everything’s history since then.

Joe Fairless: Alright, so you’re a smart cookie.

Jerry Chu: I hope so.

Joe Fairless: [laughs] That’s my unintelligent way of summarizing your background. So you co-founded Lofty… I’m on your website; you’ve got Request Demo and that’s about it, so I’m guessing that you all just started, but when I read what is on your website, which is about two sentences, it says “Trend spotting for real estate investors. Lofty AI is a real estate investment technology using artificial intelligence to identify neighborhood growth.” So as listeners on this show, what can you tell us that will help us after this conversation go identify where the next hot spot will be in our area?

Jerry Chu: Okay, so that’s a very interesting aspect, in that the reason we use artificial intelligence isn’t because that’s kind of the hot buzz word and the hot technology today, but really because the type of data that we’re pulling is really difficult for the human brain to actually understand. For example, it’s interesting – our technology applies to real estate with surprising accuracy, but we don’t use any real estate data. All the data that we’re pulling are free, public data on the internet, and they come from social media sources, forums… Essentially, what we do is we analyze what people are talking about, specifically millennials, kind of like the hipsters, and we find out what they like, what they like to eat, where they like to go… Basically, what trends they’re following. And based on those trends, we can actually find geotag information; then when you overlay that information on a map and filter by an AI, you get surprising accuracy on where the hot growth is occuring… So kind of like predicting Brooklyn in New York before everyone knows about Brooklyn. Predicting Silver Lake before the area got hot, Arts District before it became popular.

That’s really what our technology does, and the reason why it’s so difficult for a human brain to understand that type of data is because for example if we showed you there was a tweet about someone loving five-dollar cappuccinos in the area, and an Instagram post with a social media influencer taking a photo outside an art mural, and a variety of other of these weird data sources, you wouldn’t be able to compare and contrast between the different ones and weigh certain ones more heavily than the other ones. You could try, but most likely you wouldn’t end up with the correct answer. So that’s why it’s difficult for a person to directly find these trends, but it’s easy for an AI to do it.

Joe Fairless: How do you determine what weight to give one person’s voice over another’s, and ten people talking about it who don’t have as high of a degree of weight, versus two people who have a higher degree? How do you come up with that?

Jerry Chu: We look at everything on the social media posts. For example, an Instagram post – people buy fake followers and fake likes, so we don’t look at those. But what we do look at is how many comments you get, and within those comments, who the users are, how many followers they have, how often do they post, and how many people or their friend group they’re tagging in those posts. Because the more people that are tagged — essentially, if someone posts about this cool new brunch place and there’s thousands of comments, and most of those comments are real people, not bots, tagging their friends and saying “Let’s go there”, things like that – we analyze the context of what the comments actually are, we analyze the emojis to figure out the sentiment; are people responding positively to this post or this type of trend?

Based on all of that information, the AI assigns a weight to that specific data point, and that’s how it does it for thousands and thousands of data points across our platform.

Joe Fairless: You mentioned social media forums… Which social media forums or platforms do you scrape this data from?

Jerry Chu: Well, the main ones we’re looking at right now is Reddit. A lot of trends emerge there before it hits the mainstream, but we’re constantly looking for new sources. We’re looking to integrate Medium articles, we’re looking to integrate distinct generic news sources to see if anything is going on, local news sources, and things like that.

Joe Fairless: I didn’t hear Facebook. Is that because you’re not able to?

Jerry Chu: Yeah, we always respect the user agreements for the data vendors that we’re taking data from, and Facebook after the whole Cambridge Analytica situation has made it more difficult… And to be honest, we’re tracking millennial trends, and studies have shown that most millennials aren’t really on Facebook anymore. In fact, I think as recent as last month there was a statistic that came out – within 2018, about 20% of millennials have deleted their Facebook app on their phone. They haven’t deactivated their accounts, but they took the app off their phone, so they’re not really using it actively anymore.

Our whole idea is to find real-time data, as opposed to lagging quarterly reports that the industry always looks at, and we just feel like if people aren’t actively using Facebook anymore, that might not be the best source.

Jerry Chu: Reddit is very popular with the millennial age group, and attracts a variety of different people from different professions. There’s subreddits, subthreads on real estate, on real estate investment, on random trends like “What are you guys doing for fun?”, and things like that. So yeah, their user base is in fact growing.

Joe Fairless: And I imagine Reddit is one of the good platforms, or one of the ones that you use, because it’s actually accessible to scrape that data, whereas LinkedIn, Instagram – that’s more challenging or not allowed. Is that correct?

Jerry Chu: Yeah, that’s correct.

Joe Fairless: Got it. So taking a giant step back, basically you’re analyzing conversations, and then seeing what people are saying, what they’re talking about, and then as you said, you’re looking at the geotag information, or you’re overlaying that with geotag, so where they’re talking about it, and then you can see based on who’s talking about certain things, where they’re talking about it, or what they’re talking about, you can see where the conversation is… So it’s really a map of where the conversation is focused on in your area, and then your thought is based on conversation being focused in that area by these types of influencer people, then it’s likely that’s where the next area of growth is. Is that accurate?

Jerry Chu: Exactly. So if an area previously didn’t have a lot of these conversations, like people talking about how much they love $12 cappuccinos, or bone broth, or things like that, and all of a sudden over the course of a few months in a previous under-developed region that no one really thought about investing in before a lot of these activities starts happening, what it shows is that in real time there’s a lot of the demographic that essentially tends to revitalize certain areas… So young college grads that don’t have enough money to live in city centers or areas that are already nice, so they’ve been priced out, so they’re looking for cheaper areas, and as they expand out, they build newer communities, and those areas tend to start growing very rapidly. That’s what we’re tracking.

Joe Fairless: How much of a surprise is it when you look at the data, when you reveal these areas of growth? And I ask that because it seems like… If I’m gonna be talking about a new restaurant in an area — and I’m probably not one of the influencers, so maybe I wouldn’t be the best person… But if someone who is much more influential in the community than me were talking about a new restaurant – well, that restaurant already exists; so if that restaurant already exists, then that leads me to believe that there’s already a lot of attention to that area.

Jerry Chu: Right. So what we’re trying to get people into is right before the big hockey-stick growth curve. You won’t be the first one into an area, and that’s actually beneficial for you, because it kind of de-risks your situation. You’ll never be the first developer in that neighborhood. But what ends up happening is just because there’s one good restaurant in an area that didn’t have any before doesn’t mean instantly the prices for properties and rents and everything just immediately [unintelligible [00:11:30].11] There needs to be what we call sort of a critical mass of amenities and infrastructure in place, and we track areas that have started to approach that critical mass but haven’t quite reached it yet.

Joe Fairless: Got it. What are some areas that you’ve seen that would fall into that category?

Jerry Chu: A couple ones that are pretty interesting — actually, we’ve noticed interesting activity in Paramount; that’s to the East of Compton. That’s pretty surprising. If you look at the listings there for condos and single-family homes, you’ll notice a big contrast. There are homes being listed for over a million dollars, but a few blocks away there are still homes being listed for less than $200,000. So that’s a really good sign. It means that area is going through a rapid development because of that big pricing contrast.

We’ve also noticed places that people kind of have been talking about, like Hawthorne, Torrance, and places like that.

Joe Fairless: When you co-founded this company you had a business model, so this is the value proposition we’ve been talking about. Now, what’s your business model for it?

Jerry Chu: Right now we’re a SaaS-based platform, meaning that if you like what we have to offer and the intelligence we provide you, then you can subscribe for a monthly fee, and you can cancel it at any time; or you can pay upfront a yearly fee, that would essentially be the monthly fees added together, but with a 10%-20% discount. Those are the two payment options right now.

Joe Fairless: Okay. And who’s your ideal audience?

Jerry Chu: Our ideal audience is really real estate investors, people that have kind of done this process before, but in a very manual, intensive way. We’ve talked to hundreds of real estate investors since we started the company, and a lot of these people we thought we would have to explain to them “Oh, you should follow the artists or the hipsters in these new areas, and then prices are really gonna explode”, and it turns out they already know that, because they’ve done it over the past consistently, and have had very good returns. But their problem has been a lot of times it’s very difficult to find these areas consistently. They’re finding it through word of mouth… Some of them are ridiculously driving day-to-day through L.A. traffic, just looking for these areas manually. And what we provide is the same analytics, but not just for L.A. We have data for the entire United States, and even for some other parts for different countries… And you can have these analytics at your fingertip at home, or in the comfort of your office, and you don’t have to do all this manual, intensive labor to find these new areas anymore.

Joe Fairless: And what’s the subscription cost?

Jerry Chu: Right now we price it differently if it’s an enterprise model or if you’re an individual investor. Right now the individual investment is about $500/month, but if you’re a large firm, which a lot of our trial users and existing customers are, we make a custom pricing based on how many users they want and what additional features they might want.

Joe Fairless: Anything else that we haven’t talked about, that you think we should talk about as it relates to your company?

Jerry Chu: No, not specifically. I would just say the general trend is that a lot of real estate investors, in our opinion, are too focused on the macro market. They’ll hear statistics like “Oh, because interest rates are going up…” or “The whole of L.A. isn’t doing so well” or “The market is starting to tank in a city…”, but a city is a pretty large area, and often within the cities themselves there are micro-neighborhoods that are completely contrary to the overall trend. So as perhaps the whole of L.A. is declining, certain areas within it are growing very rapidly.

For a savvy investor, we think it’s a smart thing for them to look at these micro-neighborhoods, as opposed to just the macro city alone.

Joe Fairless: If I subscribe and I am looking for, say, Dallas-Fort Worth, and I have a property that I’m considering in Dallas-Fort Worth, in a certain sub-market, will I be able to see where that sub-market ranks relative to other sub-markets, or is it categorized a different way?

Jerry Chu: Yes, you absolutely will. We have two ways of categorizing it. There’s a ranking based within the city. In your case, Dallas-Fort Worth, it would be, let’s say, the top ten ranked micro-neighborhoods in that city. But then we also have another category that’s a national-based ranking, so the top zip codes within the entire country. So depending on what you’re looking for, you can subscribe to one or the other.

Joe Fairless: And what if the area is not in the top ten micro-neighborhoods? Are the remaining seven thousand ranked?

Jerry Chu: Yeah, they’re ranked, but at the moment we’re not displaying them, purely because based on demand, people have always told us they just wanna see the top ten, or the top 25. But as people put out requests and say “Actually, we’d like to see the entire ranking, or the top 50”, or whatever the range may be, we’ll obviously adjust it for our customers.

Joe Fairless: Okay, so if you have a subject property that you’re considering, and you subscribe, as of this moment you’re not able to see where it ranks if it’s not in the top 10?

Jerry Chu: Correct.

Joe Fairless: Got it. Alright, good stuff. How can the Best Ever listeners get in touch with you and learn more about your company?

Jerry Chu: Well, number one, they can go to our website, which is lofty.ai, or they can reach out to me personally on LinkedIn, as well as my partner. My name is Jerry Chu, and his name is Max Ball. We’re very active on those platforms, so just send us a request with a message in it and we’ll get back to you.

Joe Fairless: Well, thanks for being on the show, talking about this exciting startup that you two have, the implications and the value proposition that the company has, and the business model, too. I really appreciate it. I hope you have a best ever weekend, and we’ll talk to you soon.

Peter got into the real estate industry around 2005 and hasn’t looked back. He has a way of finding the hot spots and upcoming hot-spots in neighborhoods and capitalizing, as well as helping his clients capitalize on the upswing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Sponsored by Stessa– The simple way to track rental property performance. Get dashboard reporting, smarter income and expense tracking and tax-ready financials. Get your free account atstessa.com/bestever

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today I am speaking with Peter Lorimer. How are you doing today?

Peter Lorimer: Greetings! I am doing very well, Theo. Never better, in fact.

Theo Hicks: That’s great to hear, and we appreciate you joining us on the show today. I’m looking forward to our conversation. A little bit about Peter before we get started – he has been a real estate agent for over 13 years. He started off his career as the Rookie Agent of the Year with Keller Williams, and he was also named the number one Keller Williams agent in the entire Los Angeles region in 2009. He is currently based out of L.A. and you can say hi to him at PeterLorimer.com.

Peter, before we dive into the conversation, can you tell us a little bit more about your background and what you’re focused on now?

Peter Lorimer: Sure. This is always an interesting question. My background was not real estate at all. You can probably hear by my very strong British accent that I was brought over to the United States in about 1993. I was in fact a record producer, doing all of the EDM, house music, ooch-ooch-ooch stuff… And I had no intentions of getting into real estate at all. My background – I became a record producer at 16 years old, and for the first 15-16 years of my life I was a creative.

Then I’ve always been a very techy guy and I’ve always followed trends. The music that I did was computer-based, so I’ve always had a very pointed ability to be able to understand technology, and I really have the dance music industry to thank for trend-spotting, because — I don’t wanna go too down in the weeds with this, but when you are a DJ, which I was, DJs have to know what’s gonna move the floor. Also, if you’re an electronic music producer, you need to know what’s gonna move the floor a year from now.

Those muscles, which I thought would never help me in real estate, turned out to be the best asset I could have ever hoped for. When I joined the industry – I think it was around 2005 – I was expecting to find other people that were obsessed with technology like me, and I didn’t find them. So my background in real estate has been very trend-driven, very social media-driven from its very inception; very kind of putting all my eggs in one basket as far as I’m an absolute believer in all things digital, and an absolute non-believer in all things paper, which 13,5 years ago made me seem like I was a mad man from the Moon… But now it seems that the industry is pivoting much more towards my ethos of how to attract business.

Theo Hicks: So how did you get into real estate as an agent then?

Peter Lorimer: Again, being British, I was living in Los Angeles, and my mother used to live in England; I’d lived in London for 8 years of my life. I’m not from London, I’m from a town called Leeds, but I lived in London for about 8 years and I was looking into buying property there. My brother lives in Sydney, Australia, and I remember him buying property, and I almost bought a place in New York. So I remember looking at the world stage of property and thinking that Los Angeles was terribly undervalued.

I remember thinking — at one point it was approximately half what it was in New York. I was obsessed with the birth of the internet; I figured that businesses and people would move to California, as the ability to run a business developed into essentially your laptop or your cell phone… So I bet on that thesis and I started buying property in the Los Angeles area, in areas that I believed were a really good buy… That weren’t necessarily the most popular areas.

There was an area that I first bought in called North Hollywood, which was a pretty rundown area in 2000, which is when I bought my first place there, approximately… And I bought it because it was 11 minutes with no traffic from Sunset Strip. Everybody told me I was mad, and I was bonkers… And I did very well on that property.

Then a very interesting thing happened – I was very active in the creative community of Los Angeles, from being in the music business for so long. My music business pals started saying “Hey, Pete, you kind of flip homes. You seem to be doing well. Can we get in on the action? Can you maybe represent us?” And I left the music industry – this was pre-Napster; I think it was pre-Napster – because I saw that it was about to go through this absolute decimation through pirating… And I left the music business with over 30 number ones in the Billboard club charts under my belt. I’d had several massive records that year; I had a record on a label called [unintelligible [00:07:16].14] that I believe was number one in 12 countries… And I retired.

All my pals were saying, “What are you doing?” I took my winnings from the music industry and I started plowing that into property. Then I began to attract my tribe.

I had people approaching me saying “Hey, you seem to know about property. You know what you’re doing. Can you help us?” I didn’t have a license, so then I got my license, and I then managed to garner this enormous music business based primarily on clientele in Los Angeles. The rest is kind of history.

Theo Hicks: So your first year you were the Rookie of the Year… Obviously, there are thousands of people who become real estate agents of the year. What would you say separated you from all of the other new agents who did not win Rookie of the Year?

Peter Lorimer: Good question. Again, I owe a lot to my former career. In the music business, I was a songwriter that was signed to EMI Publishing… And in the music business the work ethic is so unbelievably grinding; you can work on a project for six months, you can put your heart and soul and every living breath you have into it, and it can sometimes never see the light of day. Having that work ethic of knowing that you have to work triple, double, quadruple as hard as everyone else in the music business to make a dent, I traversed that ethos into my real estate career… And the truth of the matter is I think I out-worked everyone.

The cornerstone of why I believe we were successful was due to the fact that I like to take risks with social media, I liked to not do the normal kind of generic nametag wearing vanilla imagery of real estate. I absolutely made myself the brand, and I kind of had this very rock and roll flavor about me. My lovely wife soon joined me thereafter; we’ve kind of been essentially a power couple ever since… But we most certainly have always danced to the beat of our own drum.

We look for the white space, we look for opportunity where not many people are… Because it’s an incredibly saturated market. So if I’m going up against thousands and thousands of other agents, how do I make myself look different? …and that’s what we set out to do, and I believe — the phrase I like to use is this, “If you don’t blend in, you stand out”, and I made a point of making us stand out.

Theo Hicks: Let’s talk about social media strategy. I can see in the background of your video that you’ve got a digital strategies billboard behind you… What types of social media strategies do you implement?

Peter Lorimer: It evolves, it changes. It changes pretty much like the dance floors used to change every six months; social media changes every six months… So I make a point of looking at trends. I don’t copy or follow trends, but I’m inspired. I see what other people are doing who I admire, and I go “Okay, it’s changing here, it’s changing there”, but I think one of the most important decisions I made was to do social media — I’m gonna give you an example, if you will permit me.

Again, referring back to the music business, I was at a point in my music career where I’d been in it a long time; I was kind of looking to get out, and I’d been kind of beaten up with a few projects that I’d written and nothing happened… And I found myself at times writing songs or producing records for the record company, as opposed to for myself. I thought, “Well, if I do it in this certain style, the record label are gonna like it, and I’ll probably get hired”, and blah-blah-blah… So I reached a crossroads where I said to myself, “Okay, the next project I’m gonna do, I’m gonna do it for me, and I really don’t give a toss if nobody likes it but me. I’m making it only for me. If it sells, great; if it doesn’t sell, I don’t care.” Ironically, that turned out to be one of the biggest hits that I ever had… So when I joined the real estate industry, I made a point of when doing social media I never pandered to anyone; I never put out what I thought they might want to see. Maybe I did — obviously, it’s experimentation; some of it was successful, some of it failed… But the stuff that really resonated with me was truly organic and authentic and real, and exactly the same as the Peter that you would meet in the street.

I’m not slamming agents here, but all too often I see agents playing it really safe, and not wanting to upset the apple cart… And I feel that that is really signing your own death warrant, because the real estate world has absolutely reset. We are watching the end of an era and the birth of a new one. It’s been a slow transition over the past few years. I spoke at a conference in Detroit last week, and that’s a real good kind of benchmark; it’s a litmus test for where the industry is, because it’s in the middle of the country, it’s good, hardworking agents who aren’t necessarily in New York, or L.A. or Miami, and even the senior agents, the younger agents, everybody in the room now when I was talking about social media and Instagram and the power and the reach of this phenomenon – every head was nodding… And I believe – and I’ll go on record and say this – if you are not crafting your own digital identity, you’re dead. If you’re leaving it up to your company to craft your digital identity, you’re dead. If you are having someone in the office do all your social media, you’re dead. It’s a question of time, and I think your business will contract severely within the next 1-3 years.

Theo Hicks: Have you worked with investors at all as an agent?

Peter Lorimer: Developers? Yeah.

Theo Hicks: Okay. Because a common theme amongst investors is trying to look for that investor-friendly agent, and of course in this industry there’s a back-and-forth, so the agent gives you something, but you also have to give them something in returns, so… I’m asking the money question now, which is what’s your best real estate investing advice ever, but I want you to provide that advice to that person who’s looking for an investor-friendly agent, and what they should do to position themselves to actually win that agent’s business?

Peter Lorimer: That’s a great question. I’m gonna answer it, obviously, as an agent; how should an agent try and win investor business? This is a very, very murky, dark, complex question, because unfortunately the nature of the beast with developers is they tend to bounce around with multiple agents. So if you want to work with developers, because if you work with a developer, very often if you find them the deal, you get to list it on the back-end, which is great. But. Be aware that exclusivity when working with developers is a rarity. It’s not impossible, but it’s a rarity. When it comes to development in Los Angeles, it’s high stakes, big commissions, but also intense competition.

I was one of the lucky few that managed to work with a lot of developers – a few developers – who I really liked, and I had their loyalty, and I still have the loyalty of some of them today. I have made the decision as an agent to not work with every developer that comes along, because I really value my time; and I get that a developer doesn’t want to just be exclusive… However, if you can provide value to a developer – if you have an investor that’s looking for multifamilies, and you can consistently provide them with great properties that they can buy, I always say this – nobody is gonna give you loyalty right off the bat; if you’re an agent that’s looking to get loyalty from this sector of real estate, you’ve got to deliver probably one, two, maybe even three deals. But on the third deal, or on the second deal – or even on the first deal – I would then say to that investor, “Hey, I think I’ve proved myself. I’d really like to get some exclusivity from you, if that’s possible.” And it’s all about the value-add.

There’s a phrase that I use, which is this – a lot of our industry are MLS jockeys, right? They’re not particularly proactive; the listings come in, they kind of forward them on, but a lot of the time that’s where it begins and ends. When an agent becomes really successful with developers is when they’re going the extra mile. They’re using websites such as PropertyRadar. PropertyRadar is unbelievably brilliant if you are looking to find off-market deals. It’s worth the investment, I think it’s like $60/month, but you get to categorize zip codes by how much people owe on their homes, how much equity they have, when they last refi-ed, when they last bought, and it allows you to really then zone in on properties that are not on the market, that are most likely to sell, and to a developer, that is gold.

Theo Hicks: That’s really, really good advice. Peter, are you ready for the Best Ever Lightning Round?

Peter Lorimer: Yes, and you want quick answers on this, right?

Theo Hicks: Yeah, lightning quick answers.

Peter Lorimer: [laughs] Not my normal [unintelligible [00:16:37].22] on and on and on…

Theo Hicks: Alright. First, a quick word from our sponsor.

Break:[00:16:45].15] to [00:18:00].28]

Theo Hicks: Alright, what’s the best ever book that you’ve recently read?

Peter Lorimer: Richard Branson’s autobiography, The Virgin Way.

Theo Hicks: This one’s specific to you – best ever EDM artist that’s not Peter Lorimer?

Peter Lorimer: [laughs] I love that question! Well, it has to be a personal friend of mine… His name is Sasha. I think he’s a god.

Theo Hicks: I’ll have to check him out. Best ever deal that wasn’t your first deal or your last deal?

Peter Lorimer: That’s a great question! Best ever deal that wasn’t my first or my last deal… I guess, on a selfish note, it would be doing the deal that the Calvin Klein house was built on; I was part of that developer deal, which was really freakin’ awesome.

And then the other one would be when I had a buyer walk into their first house twice. They’d worked with me and bought two houses, and they bought the first one they saw twice.

Theo Hicks: Nice. What is the biggest mistake you’ve made so far in your real estate career?

Peter Lorimer: Not listening to my inner voice. I’ll be brief, because I know it’s lightning – when I was at Keller Williams, which was great, I shunned out my own thoughts and my own identity to try and adapt. That was the biggest mistake I ever made. Follow your gut, follow your intuition.

Theo Hicks: What’s the best ever way you like to give back?

Peter Lorimer: Again, that’s a big question… The best way I like to give – I like to give everything away. I believe that knowledge is borrowed, and never owned, which is why I like to jump in front of the camera and give it all away. The best way for me to give back is to be generous in all my affairs. Not just with real estate, but when I’m standing in line at the supermarket, when I’m in traffic and somebody wants to cut in. This is gonna sound schmaltzy, but I believe this – every single day I don’t look at what I can extract, I look at what I can put in, and then the rest is up to Mother Universe.

Theo Hicks: And then lastly, what’s the best ever place people can reach you?

Peter Lorimer: The best place to reach me I would say would be probably through my Instagram, and on my cell phone, and I’ll give my cell phone – it’s 310 666 PETE. That’s my real number.

Theo Hicks: Well, Peter, I really appreciate the conversation today and learning about your journey from an EDM record producer to a real estate agent extraordinaire. Just to quickly summarize what you’ve talked about – you attribute your ability to become the Rookie of the Year to your former career as a music producer, and the strong work ethic that you obtained from that. You applied that to real estate, and essentially you just out-worked everyone else… As well as your ability to take lots of risks with your social media strategy. More specifically for your social media strategy, you mentioned how it evolves every six months or so, so make sure you’re staying on top on the newest trends.

You said that you will always look at what people are doing for inspiration, but not to copy them exactly… And you said that the most important thing about your social media strategy is being yourself, being authentic, organic and real, as opposed to pandering or doing what you think other people want. You also said that it is very, very important for you to craft your digital identity yourself and not have someone else do it for you.

Then you gave your best ever advice for real estate agents who want to work with investors, and you said that — this is kind of specific to L.A, but I’m sure it applies everywhere… That investors are not going to be exclusive with you until you’ve proven your ability to add value. So bring them deals and don’t expect or even ask for exclusivity until you’ve done at least one deal, but most likely two or three deals… And you’ve provided a great resource that they could use to find deals , which is that PropertyRadar website.

Peter, I really appreciate it, again. Have a best ever day, and we’ll talk to you soon.

As real estate investors, we love real estate! Tyrone had a different experience with real estate investing, not a good one. He fell in love with the stock market after that and never looked back. Now Tyrone not only helps his own portfolio and wallet, he helps others learn how to invest in the stock market, with a lot of real estate investor clients that just want to diversify. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Sponsored by Stessa– The simple way to track rental property performance. Get dashboard reporting, smarter income and expense tracking and tax-ready financials. Get your free account atstessa.com/bestever

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Sunday, we’ve got a special segment called Skillset Sunday. Here’s a little wrinkle for you – we’re all real estate investors or aspiring real estate investors, depending on where you’re at, but what if you wanna diversify into the stock market? Well, we’re gonna be speaking today to an author about stock investing, as well as someone who’s known as The Wealthy Investor, who is a stock market trader… Who I’m talking about is Tyrone Jackson. How are you doing, Tyrone?

Tyrone Jackson: I’m thrilled to be here, thanks for having me.

Joe Fairless: My pleasure, and nice to have you on the show. A little bit about Tyrone – as I mentioned, he is a stock market trader, as well as an author of the book “You should be rich by now.” He has the ability to simplify stock trading and investing, and thank goodness for that, because that is not my area of expertise. He’s been trading and investing for 20 years, and teaching others for 10 years. Based in L.A.

With that being said, Tyrone, do you wanna give the Best Ever listeners a little bit of your background and what you’re focused on?

Tyrone Jackson: Sure. I love when you read my bio, it makes me sound really important… So thank you for that. My ego thanks you for that.

I started out making a living in radio and TV commercials about 30 years ago, and people used to say things to me like “Hey, you should invest that money that you’re making”, and I had no idea what that meant. Like a lot of people, I thought “Real estate – people need a place to live”, so I wound up buying my first piece of real estate. The only problem is I’m not really good at repairing things, like roofs, and piping, and electrical, and all of that. And it’s not that I hated real estate, it just wasn’t my thing.

My father, who’s no longer with us, said “Hey, you should really learn how to trade and invest in the stock market. If you’re gonna hold the real estate, you should probably know something about the stock market.” I was like, “Okay…”

He was living in senior citizen housing at the time, and he says “Next time you come and see me, I’m gonna have some books and tapes and I want you to learn how to invest in the stock market.” It changed my whole world, because I realized to be rich, particularly in the stock market, all you had to do was have the ability to count from one to ten. So I would say to people, “If you went to the fourth grade, you could be rich… Because your goal is to buy a stock that simply rises, and then you can sell that stock for a profit, instead of having to worry about tenants, credit reports, piping and roofs”, and I simply fell in love with the market.

Joe Fairless: So for someone who does not have experience investing in the stock market, what are some practical things, or what are some tips for getting started in investing? Because we hear about diversification, and we need to do diversification, and whether that is or isn’t good advice could be up for debate… But let’s assume we think that is good advice and we are currently all-in on real estate – what are some practical things we can do to get started in stock market investing?

Tyrone Jackson: Okay. First of all, the thing that you want to understand is stocks are assets, just like houses, just like hotels… But they’re assets that increase in value based on the company’s performance. When I started looking at patterns, I wanted to understand “How can I add stocks to my real estate portfolio?” and one of the things I realized – pattern number one – all of today’s billionaires were billionaires created from stocks, not from real estate. There are some billionaires created from real estate, but the barrier to entry in the stock market is much lower.

So if I wanted to start investing in the stock market, but yet I knew very little, here’s a tip – you wanna start investing small amounts of money, like $500-$600, in stocks that are members of something called the Dow Jones Industrial Average. Now, what that is – the Dow is an index of the top 30 stocks in the U.S. stock market; companies like VISA, Home Depot, or the Walt Disney company. So even if you know very little about the stock market, here’s what’s exciting – those stocks that are in the Dow have the greatest probability of going higher, and have gone higher over time, because Disney, VISA and Home Depot keep earning more, which we call top line revenue. If you just understand that little bit, you see how you could have bought VISA shares for $37 five years ago, and today they’re $149.

Joe Fairless: When we take a look at the method in which we do invest, where we go — okay, I’m with you on investing in the Dow Jones, but then who do I give my money to in order to do that? What’s some advice you have there?

Tyrone Jackson: Well, here’s the beauty of it – you don’t have to give your money to anyone. You can simply open an account at a place like TD Ameritrade, E Trade, Charles Schwab, Fidelity, and you can buy more of these shares in these Dow 30 companies as they’re rising. And if you do that, buy shares as they’re rising, you’d be known as an investor. However, if you want to trade stocks, like making money in real estate, you would become a covered call writer. Now, when you’re writing covered calls, you’re selling rights to other people to buy your shares away from you, and you get paid for that.

One of my students described writing covered calls in the stock market – it’s kind of like rental stock. The stock is the real estate, and you’re just willing to rent it to somebody else at a higher price, and you can gain income for that.

Most real estate investors want a return on the money they’ve put up in the real estate; it’s the same exact thing in the stock market. You want a return on the money that you’ve put in the stock, the only thing is you can trade and buy stocks all over the world; you’re not tied to one geographic location.

Joe Fairless: Switching gears a little bit – you’ve got the book called “You should be rich by now.” Why should we be rich by now?

Tyrone Jackson: Because we’re in a fantastic era where we all have the opportunity to participate in the companies that are having the largest growth on the planet. Companies like Amazon.com five years ago was trading at $200. At the time of this recording it’s just under $2,000. Imagine if you just owned ten shares of Amazon.com.

Facebook, when it went live as a publicly-traded company, $50/share. It’s been as high as $195/share. All this technology that is changing the world, when you’re a shareholder in these major companies – Google is another wonderful example – you have the ability to rise along as an investor, as these companies are innovating and changing the way that we live our lives, and that’s exciting.

Joe Fairless: How much should we bounce around and try to find the right companies, versus investing in the Dow Jones and just riding that out?

Tyrone Jackson: Well, that’s a great question. The next thing is if this sounds like something that could be good to you, like earning another form of passive income trading stocks in addition to real estate, then you wanna go about the business of getting a financial education. You wanna learn how the market works, you wanna learn what stories you are most attracted to… For example, many of my students really like Google, so they wanna own Google shares. Or they love Netflix, because everybody has Netflix, so they wanna own shares in Netflix. So above and beyond the Dow, you wanna invest in the companies whose stories you like. I have a saying, “You never buy the stock if you don’t understand the story.”

I’ve built my reputation keeping the idea of trading and investing extremely simple, so that you can be successful at it. Outside of the Dow, you wanna find the stories of the companies that you like, and just buy shares; when those shares start to rise, you’ll be amazed at how much you can learn about the company through press releases online etc. For most people, in addition to real estate, the stock market is just this whole other world that draws most investors into it, and you begin to gain that education further and further and further. So the whole idea in “You should be rich by now” is if you really knew how to buy shares in the up-and-coming companies, the value of those shares are exponentially rising and you’d be riding along.

Joe Fairless: What are some of the traits that up-and-coming companies have?

Tyrone Jackson: Okay, so initially, in the Wealthy Investor Program, I have a saying – we don’t marry stocks, we only date them. We never fall in love, we don’t put all of our money in one… We date a stock; we let the stock rise, we buy more shares.

Companies that are up-and-coming, these days, they’re usually doing something with technology, like for example PayPal. Now, we’re all using credit cards in the real world, but PayPal focuses on transactions that are worldwide, online, in the digital environment. For example, if you ever wanna buy something online, you know there’s no slot to put a $50 bill into your computer. You’re either gonna use PayPal, VISA, MasterCard, maybe American Express. Each one of those companies allows you to own shares in those companies. So if you like that story, it simply makes sense to own those stocks. I like stocks of up-and-coming technologies because you can watch their earnings – how much the companies are actually earning on a quarterly basis… And if you’ve ever been on a date with someone and they keep getting job promotions and you’re attracted to them, you’re probably gonna wind up in a relationship with them, right? Because their financial life is going well. It’s the same thing in the stock market – when a company’s financial life is going well, the shares tend to follow, and that gives you more wealth as a shareholder.

Joe Fairless: What’s a mistake of someone who is venturing into investing in stocks that you see?

Tyrone Jackson: I see this all the time – a lot of people think they’re gonna make money in something called penny stocks… Stocks that are $2, $3, $4, $5. They think they’re suddenly going to $500. Now, let me just help you out – that rarely happens. So if I’m on a date with a stock, and I wanna be owning shares of the company that the entire Wall Street community likes – and those, again, are companies that have established revenues, not some small company that’s in someone’s garage, and they’ve discovered the greatest thing and they’re looking for another round of financing… That’s called gambling.

When you’re investing or holding shares in companies that billion-dollar institutions are buying shares in, those stocks have the greatest, highest probability of going higher, not penny stocks that are $2 or $3.

Joe Fairless: But they’re so enticing…

Tyrone Jackson: They are. We call them those sexy stocks, and as you know, sexy isn’t always good.

Joe Fairless: That’s true, that’s true. Well, how can the Best Ever listeners learn more about what you’ve got going on?

Tyrone Jackson: The easiest thing — again, we talk about this notion of getting a financial education, right? So if you go to thewealthyinvestor.net, you can download my totally free eBook called Trading Stocks for Wealth. In that free eBook is where I begin to educate you about the market, how it consistently makes millionaires, and going on good dates with Dow stocks. That’s a great free way just to dip your toe in the water, if you will, with the Wealthy Investor approach.

Joe Fairless: Some practical tips for how to get started, and who doesn’t like a free eBook to educate them on a topic that they wanna go further into, so go check that out if this is something that you’re looking to do, Best Ever listeners.

Tyrone, thanks so much for being on the show. By the way, Best Ever listeners, this is the second time we’ve recorded the interview. The first time I totally messed up with some recording issue, and Tyrone was nice enough to hang out with us one more time… Tyrone, thanks for that, and your patience, as well as hanging out with us. Looking forward to staying in touch.

Hunter is back on the show today to share a valuable skill set for almost everyone listening. If you’re a passive investor, you can use this information to vet all the deals that come your way. For active investors, putting together deals and looking for money from investors, you can use this information to bring the best package to your investors possible. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Because today is Skillset Sunday, we’ve got a special skillset for you, and we’re talking to you, passive investors – investors who want to passively invest in deals… And you know what, we’re also talking to deal sponsors (general partners), and I’ll tell you how we’re talking to both of you… For passive investors, guess what – we have a skill for you… And when I say “we”, I mean Hunter Thompson, our guest; I don’t have the skill that he’s gonna talk about in the degree that he’s discussing it, because he’s the one who has seven parts of due diligence that he recommends passive investors go through when they’re assessing an opportunity… And active investors – deal sponsors – listen up, my friends, because these are things that you should think about when you’re putting together deals and prior to offering the deals to your investors, because things will be evaluated… So how are you doing, Hunter Thompson? Nice to have you back on the show.

Joe Fairless: A little bit about Hunter – you probably recognize his name, and that’s because you’re a loyal Best Ever listener; episode 1220 he was on the show and he gave his Best Ever advice, so you can listen to that episode. He’s the founder of Cashflow Connections, which is a real estate syndication company. He has helped investors allocate capital to over 100 properties, with a combined asset value of 350 million buckaroos. He’s the host of Cashflow Connections podcast, and he’s based in L.A., California. With that being said, Hunter, do you wanna give a quick refresher about your background, and then we’ll dive right into the seven parts of due diligence?

Hunter Thompson: Sure. I think a lot of people listening to this really had an interesting moment when 2008 happened. I think that we saw the opportunity that was going to be there for people that didn’t lose their shirts, at least; that was definitely a light bulb turning on moment. That’s kind of how it was for me. Generally speaking, I like to be counter-cyclical, so when everyone’s really concerned about real estate, I jump in… And I’ve been really fortunate in the timing of the market, obviously, but also in the people that I’ve met. I built relationships with some of those people in the heart of the real estate collapse; it ended up being that a lot of them ended up being some of the most influential people in the real estate sector, particularly in the state of California, so I’ve been able to develop a network and develop a company ever since starting out as kind of a small family office, going from friends and family, to now we have about 250 investors, and spread across many properties, like you mentioned, so… Happy to talk about this today.

I think the timing of this conversation is really important. You mentioned the sponsors listening up, as well; I think in the conversation there may be some sponsors that start to cringe when we talk about some of the details of passive investment due diligence, but there’s been such a significant paradigm shift that’s taking place in the real estate investment sector. So many people have access to deals, and the amazing run-up we’ve had in the last ten years, people have been able to invest passively in real estate, particularly since the Jobs Act – they’ve been able to receive incredible results, generally speaking, because of how favorable the market has been. So I think it’s really important right now for passive investors to take an honest look in the mirror, look at their processes, how they’re making decisions on these investments, so that they can yield similar returns over the next ten years.

Hunter Thompson: The first one – and really the entire thing is all really about this, which is the sponsor. If you’re investing in a passive deal and you’re depending on someone else’s expertise, the entire due diligence process is really focused on them. So when we talk about sponsor due diligence, some of the things that I look for – obviously, you wanna look at the track record, you wanna look at references etc, but in terms of actually validating some of the claims they’re making, some of the things I like to do is call their third-party service providers and verify that things match up with them.

I like to talk to the lenders, their CPAs, their attorneys… Not only their investors. Some of those are obviously gonna be biased, because they are the ones that send you those references… Anyway, but let’s say if they say that they have a contractor that’s completed 100 million dollars of assets with them, we can call that contractor and just verify that that claim actually matches up. And if you’re going through and verifying different things, you’re gonna have some yellow flags that pop up if they’re making things up and if they’re not being honest. So that’s really one of the things that I think is a really good idea – just contact the lenders, the loan companies in particular.

Something else you could do is you can pull title on properties that they claim to own… Because anyone can just point to a property and say “Oh, we own that massive office center over there.” Well, if you can actually pull the title, you can follow the entity trail, so that you can actually understand if that entity is the entity you expected it to be, if the property is in good standing, if there’s a lien against the property etc. I think those two steps right there are gonna really help you start to validate some of the claims they’re making… But at the end of the day, again, it’s a gut check. When I’m looking at a sponsor, especially up front prior to me funding, I wanna talk about how frequently are they responding to e-mails, and how frequently are they answering their phone etc, because if they’re not doing a 10 out of 10 job now, they’re surely not going to do it later once you have funded.

Now, keep in mind, most real estate investments are long-term, 7 to 10 year holds, so the real question is do you wanna deal with this person for the next 7 to 10 years? I think those steps right there – that’s a good starting process, for sure.

Joe Fairless: How does the investor pull the title on a property?

Hunter Thompson: Good question. There’s a couple of service providers that can provide this. Soldifi.com, Chicago Title Company and the RealQuest. Those will all be able to do that; it’s just a matter of who you like more, the prices that you’re trying to accomplish etc.

Joe Fairless: How much does it cost on average?

Hunter Thompson: You can do it for free if you have a good relationship with them, but I’ve seen anywhere from $50 to $150/title. If you have a relationship with the title representative, they’ll do it for free.

Joe Fairless: And when you get the lender’s contact information, what information will the lender provide you with if you are secretly looking into if they’re telling the truth about a loan?

Hunter Thompson: Yeah, that’s a good question. I personally would not typically go that route. I usually let everyone know that I’m gonna contact who I’m gonna contact, just letting them know prior to doing that, just so that we can get on the same page… This also actually provides an insight, because you basically “Look, if they’re gonna say anything weird, you can just tell me now.” That’s actually something that saved me in the past. Same with running background checks, which is something you can do on tlo.com. They provide that, as well.

Prior to running a background check, I say “Is anything weird gonna come up on this?” Because number one, background checks don’t catch everything sometimes, and number two, they need an opportunity to explain if something weird happened in their past, or they have some yellow flags that may come up.

Usually, the lenders won’t give you specific information unless the sponsor is obviously allowing you to do so, but that’s the way that I handle that situation.

Joe Fairless: Number two?

Hunter Thompson: The on-site property manager… And I think this is important. This is something that Jeremy Roll says a lot – he’s a mentor of mine, and I know that he’s been on your program as well… Which is that you can invest in a 100% occupied property in Beverly Hills, that is in the most prime real estate in America, basically, but if the property manager commits fraud, everyone’s losing money. So I wanna look at the property manager, their relationship with the sponsor and how frequently they’ve worked with them before; do they have other properties in the market? Are they knowledgeable about the specifics of this particular asset?

Then I wanna look at things like what software do they use? What do the communications look like between the on-site manager and the sponsor? How sophisticated are they in some of those data points? And again, there’s a lot of different software companies out there, so you’ll get a lot of different answers, but if you start asking questions like this, you’ll start to see the range of what’s going on behind the scenes.

Joe Fairless: What’s a good answer, and what’s a bad answer?

Hunter Thompson: Well, Yardi is probably the industry standard. Each asset class, self-storage, has its own — a lot of people use U-Hauls, self-storage software, which is web self-storage… That answer is that they can scan a copy of the handwritten notes that they’ve provided. That’s the kind of person that we wanna buy a property from, not the kind of person that we wanna have manage our property… So that will kind of give you an idea.

Joe Fairless: Yeah. Okay.

Hunter Thompson: Number three is the loan, and I think this is really critical. Probably for most passive investors, they aren’t thinking about this as critically as they should. I would say that 99% of all the horror stories in the U.S. have something to do with debt financing. Loans coming due at the wrong time, you can have an inability to refinance, interest rates changing, stuff like that. Almost all of the stories that have to do with loss of principal have to do with the financing portion… And keep in mind, the financing is the majority of the purchase, so this makes sense.

There’s a couple of different metrics that I wanna look at, and it’s important to look at the entirety of them to understand who you’re dealing with. Obviously, loan-to-value is important, but what is that loan-to-value based on? Is that an appraisal? If that appraisal is the way that the loan-to-value is being established, is that appraisal based on after repair value? If there’s a significant capital expenditure, if there’s significantly rehabbing a property, that rehab needs to be completed before that loan-to-value is accurate.

So you wanna look at loan-to-value, and also you wanna look at purchase price, which will give you a more transparent understanding of the true worst-case-scenario if there was gonna be a problem, especially early on. You also wanna look at the debt service coverage ratio. Sort of the industry standard is usually somewhere close to 1.25%. In certain industries, let’s say mobile home parks in particular, you can see much higher debt service coverage ratios as you add value by raising rents. You can do so relatively quickly, because that asset class is on monthly leases.

And then you also wanna look at the interest-only period. This is something that you really have to read between the lines and understand this in order to assess the difference between two different properties. The interest-only period is obviously the time at which the loan is not paying down itself, and it’s just paying the interest only. Once that interest-only period is over, the payments increase. We usually see a range of 1-2 years, sometimes 5, but keep in mind, the longer the interest-only period, the more aggressive, the less time in which you have to pay down your debt before the refinance happens.

The really important reason that I mention this though is that if you’re looking at two properties that are relatively comparable, but one has a one-year interest-only period, and the other has a five-year interest-only period, you’re gonna think that the one with the five-year interest-only period is much more advantageous, but it’s because there’s a different risk component. I used to kind of think that if you were doing five years interest-only, that the sponsor was aggressive, because that’s kind of a long time.

But I especially think right now it’s interesting to take a look at properties where the loan-to-value is very low, let’s say 55% or so – then you get to have a five-year interest-only period, and the fact that you’re taking such a low loan-to-value means that you basically would be in the same position if you only had a one-year interest-only period with a more normal loan-to-value. I know that may be a lot of numbers for listeners that aren’t as familiar with these terms, but the whole point is that there’s a lot of moving parts to this, and it’s important to look at the entirety of the capital stack and the loan, debt portion particularly, to move these metrics around to see really at the end of the day who you’re dealing with, if that makes sense.

Joe Fairless: You mentioned the loan to purchase price – what range do you look for there?

Hunter Thompson: Typically let’s say 85% or so, I think that makes sense. We wanna invest in properties which are undervalued or we’re able to get a good deal, so… Typical commercial real estate assets, somewhere between 65% and 70% loan-to-value, so it would make sense if you were able to get a discount, loan purchase price would be in that 85% range… And I feel comfortable with that, depending on the overall big picture thesis of the investment.

Joe Fairless: Number four?

Hunter Thompson: This is about the property performance in the proforma. Looking at the proforma generally, if you start to look at the proforma and ask questions about the proforma, you’re going to be one of those few investors that actually does this. One of the things that I think is a really good starting point is to either look at or request the Trailing 3 and Trailing 12 month financials for the property, and compare those previous financials to the year one, year two, year three projections. And really, the thing you wanna look at is what are the major differences between the Trailing 12 month financials and the first year; and then any big differences that come up, you can ask the sponsor to kind of validate that.

The biggest one, and probably the first thing that I usually look at, is the operating expense ratio. If something is off there, you can then find out what it is, but if you have a property that is operating in the 55% operating expense ratio, meaning that 55% of the income is going towards operating expenses, then in year one that jumps from 55% to 45%, you really wanna figure out what is changing that’s validating that? It’s not a red flag, but it is something worth asking about.

When you go through and ask those types of questions, you’re gonna get some really interesting answers and it’s gonna paint a much more clear picture as far as how detail-oriented the sponsor is being in that underwriting and how he validates that change in operating expenses.

Something else I think is important is cap rate expansion or compression. I think right now a conservative underwriting standard for the cap rate — let’s say you buy a property at a 6-cap, and you’re holding it for ten years. I think that 10 basis points per year is a pretty conservative route to go. That would mean buying a property at a 6-cap, estimating to sell it at a 7-cap. Now, it’s not necessary to underwrite it like that, but I think that it’s a good sign for me if I see that. One of the things I caution people about is sometimes sponsors will say that they’re underwriting to a 10 basis points per year expansion, but they’re saying that they just got a screaming deal on the property; so they may be buying at a 6.5-cap and saying that it should be a 6-cap, and therefore they’re buying at a 6.5 and it’s turning into a 7 by year ten. But that would be closer to 5 basis points per year, if you’re following the math on that. And again, I know it’s a little bit confusing, but this is the kind of stuff that actually makes a huge difference, because the multiple of your income that you’re trading in at the end can make a huge impact on the overall return profile of the deal.

Joe Fairless: And if that was a whole lot to take in, a simple question you can ask them is “What’s your going in cap rate? What’s your projected exit cap rate, and how many years are you planning on holding it?” and then you can just determine if they are adding 10 basis points per year for the whole period… Or sometimes, if they’re just keeping the cap rate flat, or *gasp* if they’re saying the cap rates will be lower at the exit – I mean, that’s a huge red flag.

Hunter Thompson: Yeah, I appreciate you jumping in there, because that’s actually a much easier way of explaining what I was just explaining… But really, the question is “Is there a cap rate expansion? Is there a cap rate compression? What’s the rate at which that takes place?” and justifications for each.

Joe Fairless: Number five.

Hunter Thompson: This is really the market itself. The main thing I wanna look at is diversity of employment. And again, this is just my particular perspective, but I like to be in markets that are a 35 to 40-minute drive away from half a million population in the major metro. If you do that, generally you’re going to have a good mix of medical, education, government, tech and hospitality. I would say that tech in particular – there’s markets all over the place… Austin, which is obviously a great market, Denver, which is obviously a great market – they’re getting a ton of really high-paying jobs, but a lot of the tech companies are funded by VC firms; that money may or may not be there in terms of the next 5 or 10 years. It’s a cyclical business. But nothing is more cyclical than hospitality.

Look at what happened to Vegas during the last correction. It’s the first thing to go. So you don’t wanna be in a market which is over-exposed to hospitality. You may be hesitant to be in a market that’s over-exposed to high-end tech, just because it’s uncertain, a lot of these companies aren’t profitable etc.

I personally don’t like to be over-exposed to government. I don’t like it if there’s basically one tenant. I’m looking for true diversification, so that population factor is a big piece of this, but then you do have to look at the economics of the market itself. One of the vehicles I use for that is esri.com. They have a business analyst. Pretty inexpensive for what the value is… Yeah, esri.com, business analyst – that’s a good resource for anyone that’s listening.

Joe Fairless: When you say “over-exposed to hospitality and government”, what percent or how do you quantify that when you’re looking at it?

Hunter Thompson: That’s a good question. I don’t have a good number for that, because I try to stay really far away from that… But there’s some markets where, let’s say right next to an airbase, where there’s not really a lot of population except for the air base. That would be a red flag for me. But I’m looking for a good mix, and in the market that we look at, the mix is so significant that we’re avoiding getting into that level of detail.

Joe Fairless: That’s an important thing for us as deal sponsors… As are these other things, but this one I want to mention – we look at if there’s a market and a submarket that’s more than 20% of any one industry, then we’re gonna dig deep and figure out what industry that is, and if we’re fans of that industry or not.

Hunter Thompson: That’s good to know.

Joe Fairless: Number six?

Hunter Thompson: This is the property itself. Again, this is just my perspective; I have a very niche perspective on investing as a whole, but some of the things I like to look for – again, diversification of the tenant base. With self-storage, I like to look for 400 units or more; that’s usually 50,000 square feet. With multifamily, I think a lot of investors look for 100 units or more; some people like 200 units. Really the whole point is if 10 tenants move out, are you gonna have a problem with cashflow? If 10 tenants move out of a self-storage facility with 400 units, no one is gonna know, including the investors. With something like office or retail, I like to see 10 or 13 tenants. That’s one of the challenges for me with office – there’s not a lot of buildings that have 13+ office tenants around.

The key is that the businesses can be very cyclical, businesses go away, it’s a company, they don’t care, there’s no emotional connection to the place… You can have challenges like that. With senior living, similarly, I like to see 100 beds.

Some of the other metrics – the daily travel vehicles is an important metric. I personally at least get a little bit uncomfortable if it’s less than 20k daily travel vehicles per day, but it’s really important to know if there’s visibility from those daily travel vehicles. Can 20k people actually see your property, or are you tucked away under an underpass where there’s 80k right above you, but you can’t really see it; I’m making a point, but I think that that’s actually kind of important.

And then also the physical occupancy. That’s gonna help you in the risk profile overall. Under 60% is usually outside of our risk profile. And mobile home parks are unique, because you can buy them cash-flowing at 60%, obviously. 80% usually lowers risk, but you’re able to add some value. 90% occupied – usually it’s a stabilized asset; you may be able to raise rents etc. but if you’re relying on cap rates, I think it’s challenging at this stage of the cycle. But I think those are some good property due diligence.

Then you go through the things — the big ones that can really cause problems are things like roofs, electrical, plumbing… Elevators are very expensive. We had to fix one once in a property a couple years ago. So those are some of the things that I look at when it comes to the property itself.

Joe Fairless: And number seven…

Hunter Thompson: Number seven is probably gonna surprise some people, but it’s the legal documentation. At the beginning I mentioned that the sponsor themselves are really what this entire thing is about. Every single thing you’re looking at, when you’re asking questions to the sponsor, you’re really trying to understand who they are as a person and how they operate as a company. The reason for this is that if you’re a passive investor and you’re investing 50k or 100k, you very well could chase $100,000 by spending $100,000 in court if something goes sideways. So the legal documents are the least important; they’re still incredibly important, they’re on the list, but when it comes to the order of importance, that’s why. But when you are looking at the legal documents, the first thing I’m looking at is how much money are they raising and is the money appropriate to be raising with or without a PPM.

Most attorneys — this is a grey area thing, but I’d say that if you’re raising more than a million dollars, if you have more than ten investors, that you should be using a PPM; just my opinion, not legal advice… But that’s something I wanna look at.

And then within the PPM, what is the quality of work? Is it a legal firm that I recognize or that someone in my network has worked with in the past? But also, does the legal documentation actually match up with my going in perspective of the deal? Does it match up with the executive summary? Is it fair to investors? Do they have voting rights? If so, under what circumstances do they get to vote?

One thing that I think is a complete non-starter for at least the way that my company is set up is we do not have mandatory capital calls under any circumstance… So we cannot invest in deals that have that stipulation or provision in there. But those are the things you wanna look at – do they require additional capital calls? If there isn’t a requirement for additional capital call, what do the terms look like if you violate that requirement?

Those are the kind of things that you really start to get an understanding of “Are they trying to paint a fair picture? Are they trying to stack the deck in the sponsor’s side, or are they trying to make things fair? Does it look like a contract or an agreement, or does it look like a complete “Never invest in this deal. Okay, sign your bottom of your lane. Here’s the wire instructions.” So those are kind of the things that I look for when it comes to legal documentation.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Hunter Thompson: I’m the founder of Cashflow Connections. You can go to CashflowConnections.com. I also host a podcast, which you’ve mentioned, which is the Cashflow Connections Real Estate Podcast. And I created a mentorship program to talk about some of this stuff. I think it’s really important to focus on this stuff right now. That’s the cfcmentorshipprogram.com.

Joe, I wanna tell you, we just covered so much… This is why your show is so awesome. You have a 30-minute program in which people are getting unbelievable content, so again, it’s an honor to come on and I really appreciate it.

Joe Fairless: I’m glad that you came prepared and you gave us a lot of really good information… And who cares if I’m glad or not…? I’m sure the Best Ever listeners are very glad, and grateful, too… So thank you for being on the show. Seven parts of due diligence as a passive investor:

Sponsor.

The property manager and the communication, and correspondence and the technology that they use with the asset manager.

The loan. You gave us some things to look for with the loan.

The property proforma.

The market.

The diversification of the tenant base.

The legal documentation.

Thank you for being on the show again. I hope you have a best ever weekend, and we’ll talk to you soon.

Eddie is a returning guest who is back today to tell us about affordable housing. We’ll hear why he chooses to go with affordable housing and why he thinks more deals can be made if you can do affordable housing with your properties of potential deals. He also enjoys it because he likes to be able to help with the housing crisis. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Eddie Lorin. How are you doing, Eddie?

Eddie Lorin: Great, thanks! And you?

Joe Fairless: I’m doing great as well, and nice to have you back on the show. Best Ever listeners, you can listen to Eddie’s best ever advice, episode 1211; it is called “Good deals are made, not found.”

A little bit about Eddie’s background – he for the past 30 years has purchased and transformed over 3 billion dollars’ worth of multifamily real estate. He’s made it his life’s mission to fix the housing affordability crisis in America. Based in Los Angeles. Website is ImpactHousing.com.

Today, because it is the weekend, we’ve got a special segment called Situation Saturday, and it is the current housing crisis facing the U.S. working class, and steps that we can take to capitalize on it or just be more aware of it. With that being said, Eddie, will you give the Best Ever listeners a little bit more about your background, just as a refresher, and then we’ll get right into the housing crisis?

Eddie Lorin: Sure. I’m a NOAH guy. What’s NOAH? Naturally Occurring Affordable Housing. You can build for $500/door in urban areas, or you can buy at $150-$200/door (or even less) and deem it affordable. That’s what I’m trying to champion. Let all the new product go to the people that can afford it, and let the existing product that’s older, and basically less expensive, go to the working class. That’s what it’s about.

The problem is that a lot of people are still stuck and staying in these rent control departments, and they don’t belong there… As well as they’re just staying put, and we need to push them up, and we need to push in the people that have one foot on a banana peel. I’m a crusader for the fellas that are just hard-working, decent human beings trying to make ends meet.

Joe Fairless: And how does that come to fruition with what you do?

Eddie Lorin: Well, here’s a prime example. I did the first NOAH deal in the city of Los Angeles; I’m very proud, we’ve just closed it yesterday. We took 50 units in Korea Town, and through government-sponsored opportunities i.e. property tax abatement, we were able to cap the rents based on the area median income of what people make. The affordable housing business is based on what’s the area median income and the rent associated with that. No one should pay more than 30% of whatever they make. As a result, the rents are capped at a certain level. And again, the quid pro quo is to have a property tax abatement, and you need the right capital to invest. The returns are still very solid, but it’s a longer-term play and less cashflow, because of course, if you’re gonna cap the rents and make things affordable, it’s more like a 4%-5% return than the normal 8%-10% returns that we get from market rate investments, cash-on-cash, day one.

Joe Fairless: You mentioned a longer-term play, too…

Eddie Lorin: Yeah, 15 years is what we’re gonna be looking at here on this first property. It’s a 1920’s building, it’s studios and ones, it’s ideal for transitional housing and some of the homeless people that are on vouchers… That’s what it’s earmarked for.

So every vacancy will be earmarked for these people, that are through a non-profit which is called People Concern, and they basically provide counseling services and social work and check-up on all their meds, and retraining workforce… They do everything, they package it up, and every time we have a vacancy, they’ll come in.

These are people that are gonna stay for a long period of time, because they’re trying to make their transition back into the workplace. They really can’t afford the rent anymore. In Los Angeles alone it’s estimated by the USC’s Price School, which I’m very involved with, 50% of the homeless are not homeless because they’re talking to themselves and they’re crazy, or whatever you wanna say, or they’re mentally ill – they actually just can’t afford rent anymore.

People think the homeless are all pathetic, and some of them are, and it’s sad, but we don’t deal with those people. We wanna deal with the people who can function, and still have a job, but their job is not enough to pay the rent. You can be paying 50% of your income on rent; let’s say you make $40,000, and you could be paying $20,000 a year in rent, and then if you add in your transportation costs, you’re actually paying 70%. So we’ve gotta make sure that people can live where they work, or somewhere close, and near public transportation… Concepts like transit-oriented development (TODs). These are some of the concepts.

Joe Fairless: Why 15 years?

Eddie Lorin: That’s the California pre-payment penalty on this particular program. But we need to come up with more creative programs, not just the government, to be able to finance this stuff. We need private foundations and individuals and wealthy people to step in where the government really can’t. This is just a pilot program. There’s only so much doe set aside for this, what we can do. It really needs to expand to a multi-faceted level of different colleagues and constituents and stakeholders. It’s a very complicated issue. We need to build our way out of the problem, we need to buy and deem product affordable, and we need to bring in many levels of tranches of different financing and equity to make these things happen.

Joe Fairless: From an investor’s standpoint – you mentioned 4%-5% in general, and like a 15-year project… What’s the exit plan at the end of 15 years?

Eddie Lorin: Well, you’re riding up area median income. It’s a different mentality, different model, it’s a longer-term play, but area median income does go up over time, and rents will go up in conjunction with area median income, rather than market forces.

Look, in New York stuff trades for 600k-700k/door; that’s old product. Here in Los Angeles we’re still at 200k/door for old product. I think there’s a lot of room for opportunities of appreciation… And there’s rent control in New York, so it’s a trade-off, but there’s still plenty of headroom to make money long-term in urban real estate, because it’s supply and demand. Look, we have a huge housing shortage. L.A. alone – 500,000 units short. Across the country is four million units short. You can’t lose, potentially. The SEC will get mad at me for saying that. [laughs]

I mean, how could you lose money if you’re investing in housing? Not A-class, not $3,000-$4,000 rents, but $1,000-$1,500 rents. It’s hard to imagine how you can get hurt, that’s all I’m saying.

Joe Fairless: As a listener who’s listening to this somewhere else other than Los Angeles, and they’re a multifamily investor or aspiring multifamily investor, or just any type of real estate investor, what action can be taken on their behalf?

Eddie Lorin: Well, it’s gotta be a public-private partnership. If you wanna do it yourself, you’ve gotta go to the local jurisdiction and say “Look, I wanna supply affordable housing.” They’re gonna say “I love you. Step up, please. How can we help?” You’re gonna say, “Look, I need a property tax abatement, I need some low-interest financing, I need some supplemental vouchers, because if all I’m gonna get is $800 from the Section 8, I need $1,000 rents to make this deal work. Where do I get the $200/month?” “Oh, well this local foundation is in touch. They wanna help to solve the problem.”

Look, it’s not easy. I’m a crusader. I’m pushing a rock up a hill trying to get these people to step in, and it’s very slow and it’s very hard. If you’re not patient and you’re not passionate about solving this problem, I wouldn’t bother. It is a difficult situation, it is gut-wrenching, but it’s rewarding when you can finally get something done.

It took me two years to get one building done in the city of Los Angeles. But more people have to fight the fight, and it’s not easy. Or you can invest with a guy like me, and that’s the difference. In Maryland we’re buying a deal, and actually the county had the right to purchase it, and in order to keep them from purchasing it, we put on restrictions, and I’m asking them and I’m hoping they come back with low-interest financing as a quid pro quo, because they’re not gonna give a property tax abatement… There’s gotta be some offset for putting on rent restrictions, if you wanna do that.

My theory is that Amazon’s going to the Beltway, but that’s a different story. But I think investing there is an amazing opportunity, and there’s such a need for affordable housing there… And if you bring 50,000 units to wherever Amazon ends up – again, I think they’re gonna end up there – you’re gonna have massive, massive–

Joe Fairless: I agree, by the way. I think it’s going to DC, too.

Eddie Lorin: Yeah, he owns The Post, he has a 23 million dollar house, and the third thing is he’s got a sales tax issue politically, and “Wink-wink, Washington… I’ll bring all these jobs here, and we won’t have to charge sales tax.” Again, my theory. I don’t know.

Joe Fairless: Yeah, my theory, too. Who the heck knows… Speculation, but I agree. I didn’t initially, but then once they announced the second or the finalists, that’s what I thought, too. Well, affordable housing – there are three things you can do to help make the numbers pencil out; one of the three things, or multiple of the three things you HAVE to do to make the numbers pencil out, most likely – one, you said property tax abatement; two, low-interest financing, and three, supplemental vouchers. Where would you go for each of those three?

Eddie Lorin: [laughs] Property tax abatement is purely government, pushing the rock uphill and telling them “You want affordable housing? It’s a hell of a lot cheaper to just give up property tax a year, rather than fund all these new developments, which are so expensive. It’s cheaper to do it this way, and it’s faster”, and it avoids the [unintelligible [00:13:12].13] problem, right? If you buy existing product, there’s no neighbor who can complain “I don’t want the homeless here” or “I don’t want low-income housing here.” It already exists, they can’t stop you. So this is the crusade with the government agencies, and it’s tedious and time-consuming and it will be something that’s a love of your life for years… But again, we all have to fight the fight, and I’m trying to lead the fight. So that’s the government, on the property tax abatement.

Joe Fairless: But specifically, when you say the government – specifically where do you go for–

Eddie Lorin: The town hall, or whoever you pay your property taxes to, the county assessor; you need to start there, and then you need to see what politically needs to happen in order to get this approved for a property tax abatement. Every county is different, I don’t know.

Joe Fairless: What are some examples for what you’ve come across, what needs to be done?

Eddie Lorin: I’m doing this program through CalHFA, which is a financing agency in California, and they’re associated with what’s called the LURA – Land Use Restriction Agreement. And in the state of California, it’s statutory that you can avoid property taxes if you keep your rents at a certain level, based on area median income. So that’s one example.

You have to dig, and dig, and dig, and fight, and put up with a lot of rejection. It’s not easy. Sorry to be so blunt.

Joe Fairless: No, you’ve made that clear, we got that. Okay, so – property tax abatement, that’s how we follow the process. The next one is low-interest financing.

Eddie Lorin: Well, that can come from the government agencies. Again, you network around local foundations and wealthy people who are interested in helping the world, and helping to solve the problem. There’s a certain bucket called “Program-related investment.” Let’s say you’re a billion-dollar foundation. The IRS says you must give away 5% of your money, or 50 million dollars a year. Give away, or you can do a low-interest loan called a program-related investment. It stays evergreen on your balance sheet, rather than being gone, in the form of a grant, as long as it’s not a market rate investment, it’s below market… So you can loan money at 2%-3%, which if you’re buying a 4-cap, you’ve gotta have equity that’s cheaper than a 4-cap if you’re financing [unintelligible [00:15:29].16] So that’s what you need, is that low-interest financing from wealthy people, or a foundation, or a government agency, or whoever it’s gonna do it, and that’s it.

Then the third is also government and foundations, to do a supplemental voucher. Now, it’s illegal as it stands now to put any supplemental vouchers behind a Section 8 voucher. That needs to change. I don’t know how to change it, but it must change, and there must be some way for people to be able to supplement their rent if they’re getting vouchers. Let’s say the rent is $1,000. Someone is making minimum wage. The most they’re supposed to pay is 30%, so the most they should pay in rent is $550. They’re going to get $450 in a voucher from the government to the thousand dollars, right?

Joe Fairless: Yup.

Eddie Lorin: Well, what if you need $1,200 to make the deal pencil, because it’s a competitive environment, and the pricing is too high to make $1,000 rents work? You need to underwrite another $200. You’ve gotta find it somewhere, and it’s gotta be lawful, and I’m trying to figure it out. But you asked me a solution, and I didn’t say it was possible. It needs to be possible, it needs to happen, and I will make it happen, or someone will.

Joe Fairless: What’s the easiest part of the process?

Eddie Lorin: Finding a deal that’s cheap enough to work, or finding the benevolent capital who’s willing to take a lower return short-term for a long-term appreciation, who believes in the market and believes in the demand for affordable housing. Look, it’s all about your cost of capital in any real estate investment, and you have to be able to make money in the process. It’s a lot of work, you can hear it in my voice; I need to make money too, right? I’ve got a staff, it’s a lot of work, and to find the right investor is the key. Someone who really says “You know what, I love what you’re doing. I don’t need to bust your balls and make a 20 IRR. I’m happy with less. Let’s change the world together, one apartment at a time.” That’s what is needed the most, it’s capital.

Joe Fairless: What does the IRR pencil at to the limited partner after 15 years averaging 4%-5%?

Eddie Lorin: Well, including the sale, it’s probably 11%-12%… Which is fine, but they say “Ew, it’s affordable housing. Ew, it’s old product. Ew, it’s this, ew, it’s that. I like shiny product.” One excuse is as good as the next, is the issue. But people need to be willing to roll up their sleeves and believe in the long-term and look at other urban areas, how prices have jumped, and you’ve gotta hold your nose and say “Oh my god, 200k/door for this?” Soon it will be 400k a door, in 15 years, just based on “Buy buildings, buy real estate. They’re not making any more of it.” Basic.

Joe Fairless: Anything else as it relates to affordable housing? You actually talked through how to act on it, which is great for the Best Ever listeners who are looking to do this… The three things, which I’ll summarize in a little bit. Anything as it relates to this topic that we haven’t talked about, that you think we should?

Eddie Lorin: Look, the government needs to be more involved in solving the problem. This administration unfortunately is not doing enough. I’m not gonna get political; I’m just gonna tell you that instead of cutting the budget at HUD, we need to increase the budget at HUD, and there’s nothing any of us can do, other than voting the people who do believe in this.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Eddie Lorin: It’s ImpactHousing.com. You can find me there, and e-mail me through there. It’s really a complex issue, but its’ pretty simple if everybody would get on the same page and not be afraid. So anybody who wants to be part of the solution, anybody who has capital that they feel they want to invest for a special purpose, please let me know.

Joe Fairless: Three ways that you can approach having affordable housing make sense when you’re running your numbers. One is property tax abatement – you talked about that. Two is low-interest financing, and three – supplemental vouchers. You went into detail with each of those three, as well as just talking about the overall approach and why it’s needed, and the 50 units that you did in Koreatown. Congratulations on that.

Thank you so much for being on the show again. I hope you have a best ever day, and we’ll talk to you soon.

Mark bought his very first investment in LA while he was working on season 1 of Family Guy. He was hooked after the first deal and knew that he wanted to do it for the rest of his life. Now mark has about 140 units, all multifamily, all in Los Angeles. Hear how he has been able to scale up in a tough market.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Mark Hentemann. How are you doing, Mark?

Mark Hentemann: Great! How about yourself?

Joe Fairless: I’m doing great, and nice to have you on the show. A little bit about Mark – he is a writer/producer/actor in TV and film. He was a part of the team that launched The Family Guy, he’s also been a real estate investor for 17 years, focused on multifamily. His focus is on value-add, and we’re gonna talk more about that. Based in Los Angeles. With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mark Hentemann: Sure. I’m originally from Ohio – I think where you’re from, as well… Or you’re living there now. I started as a greeting card writer and illustrator at American Greetings in Cleveland, and then moved into late-night comedy with writing for David Letterman, then moved out to L.A. and got hooked up with a brand new show called Family Guy back in 1999, and was through that after my first couple scripts payments, where I had a little bit of money saved up. I was trying to move out of my one-bedroom apartment and got talked into buying something, and that got me into real estate.

Joe Fairless: Who talked you into it?

Mark Hentemann: It was completely by accident. I’m an accidental real estate investor. I was looking to move into a new apartment, but I think across the street from the apartment building I was looking at was an open house, and the broker there said “Why are you throwing your money away on rent when you could own something?” My knee-jerk response was “I am in the entertainment industry. Do you think I wanna be saddled with the responsibility of a mortgage? My show could be canceled tomorrow, and I could be out of work for a couple of years.” I was on Family Guy and we didn’t even know if it would make it through the first season.

Joe Fairless: So that’s what you said, and then did that broker convince you, or…?

Mark Hentemann: You know, our conversation was — she gave me some good reasons why I should invest and build a nest egg and some passive income, and I said “Alright, look, the only way I’m gonna invest in anything is it would have to be the best investment I’d ever make. Don’t show me any pretty house. Show me something that’s a dump and that is undervalued, and that will provide me with some kind of financial cushion.”

So we parted ways, and I figured I’d never hear from her again… But she called me a couple weeks later and she said “I found the investment property that you need to buy. The trick is you have to become a landlord” My reaction was like “A landlord?! I don’t wanna be a landlord.” But I met her there, and it was kind of a dilapidated duplex in Hollywood, and it had goats and chickens being raised in the backyard. The sellers were moving to Kansas to live off the grid, and they were digging an underground house… So they were kind of eccentric.

Joe Fairless: Oh, yeah.

Mark Hentemann: But I could see the potential in it. It was one of those 1920’s buildings that had great original features to it. Not a ton had been done, but it just needed a ton of cosmetic work. I decided to take the plunge, and I was like “Alright…” I held my breath, jumped in… Of course, it was L.A., so there was 15 other bidders on this thing, and it began this rollercoaster ride of increasing our price almost daily.

I had offered $350,000 as my initial offer, and after two weeks the realtor was like “You are in the top two. If you go to 435k, it’s yours.” It was traumatic, it was nerve-wracking, I couldn’t sleep, but I pulled the trigger and got it. I immediately had huge buyer’s remorse; I thought I’d just made the biggest mistake in my life. But I tried to embrace it and jumped in, and tried to become a landlord.

My first tenant was a guy named Mike Henry, who works on Family Guy. He does the role of Cleveland, and Herbert, and Consuela, if people have watched the show. I got in and tried to learn how to become a landlord. He was a good test of a tenant.

It was fun. I did the fix-up and agonized over it. I owned the duplex for about five years, and sold it – and I attribute this 100% to luck, but I was riding a rising tide in the market in the early 2000’s, and ironically, I thought the market was already too hot when I got in, but I got out in 2005 and made a great profit. I think I sold it for 1.27 million, and I bought it for 435k.

Joe Fairless: That’s a pretty good profit, absolutely. How much did you put into it?

Mark Hentemann: I put in 43k. I did the 10% down as a first-time buyer. Looking back, I would have done one of those FHA loans, where you can get even lower. I like leverage; leverage seems to equate to better returns, as I look back on all my investments.

Joe Fairless: Now fast-forwarding to today – what does your portfolio look like and where is your focus?

Mark Hentemann: Well, after that experience I was hooked. I fell in love with real estate as I was doing this. It was a little trying, and I had to get over the bumps and learn a lot about it, but I had decided that this is something that I wanna do for the rest of my life, and I started to collect buildings.

Right now I have about 140 units, all multifamily, all in Los Angeles.

Mark Hentemann: Well, I think I want to move outside of L.A. and I have looked at things… I got in a bidding on an 82-unit building in Cleveland a couple months ago, and I was really excited. The fundamentals of that building were so good… But there were eight other buyers and I was second, or something like that. I got outbid.

Joe Fairless: You’ve gotta tell them you’ll write them into an episode of The Family Guy, or something…

Mark Hentemann: Right… [laughs] I’ve gotta use some other angle to get in there. But I’m looking in Salt Lake City… There’s cities that I like, but yes, I’ve gotta get out of my backyard, and I will… But so far, L.A. is an interesting market. It’s a vibrant economy, it’s so diverse… It feels to me like there’s 120 pockets of L.A., and I know them, I drive them, so I know street by street. And in my experience, and even as L.A. gets heated up as it has been, I can see – at least I fancy myself as being able to see – some neighborhoods that I know are inevitably going to improve, just by their proximity to massive development, by their proximity to downtown, which is exploding, and they’re still very affordable.

I have that knowledge of L.A. that I don’t have at any other city, which has allowed me to continue to find deals in a complex market, even with thousands of other investors competing with me.

Joe Fairless: Oh yeah, and I’m looking forward to talking to you about your approach, because I don’t interview a whole lot of investors who live in L.A. and actively acquire a portfolio of multifamily properties in L.A. What was the last property you bought?

Mark Hentemann: The last property I bought was a 36-unit building, and it was in an area called West Lake in L.A., which is an area that I like a lot. Like I said, it’s really close to downtown.

It was an interesting scenario… I do this search — my approach is I get a ton of deals e-mailed to me almost annoyingly on my e-mail every day, and anything that’s interesting, I throw into a folder. But then I’ll just go on searches of my own, and I’ll apply filters. I like cost per square foot; I think it’s a great basic metric. You have a lot of metrics to process and synthesize as you look at a property, and [unintelligible [00:11:09].09] and you never get everything you want. Sometimes you get a great cap rate, but the cost per square foot is really high… And I like cost per square foot. It’s straightforward, it’s honest, it tells you what the asset is worth… So I look for that.

I’ll even go on something like LoopNet and do a filter; there’s 20,000 buildings for sale at any given time in L.A. I’ll put a filter on for really obscenely low cost per square foot, and this is how I found this building in West Lake, this last 36-unit building. I think I put $210/square foot or less. To give you some perspective, in L.A. price per square foot can go up to $700 or $800 per square foot. I think the average is maybe high threes to mid fours… And I found a building.

As usual, my search for cost per square foot resulted in maybe 15-20 buildings. I eliminated 12 of them…

Joe Fairless: How come? Based on what?

Mark Hentemann: I know the neighborhood, I could look at the building and see “Alright, that’s in a rough pocket. That building looks terrible.” Kind of analyze why it’s priced so low. Often times there’s a good reason why it’s priced so low, but there’s always anomalies where there’s buildings that are priced low, and maybe it’s for some other reason that’s not evident on the setup. Occasionally, some of those are in those early stages, up and coming markets. This one fit that profile, and I happened to know the broker; I had done some deals with him.

I called him and I said “Hey, this looks interesting. What’s the situation?” He said, “As your friend, take my advice: run the other way.” I was like, “What? What do you mean?” He’s like “This is our third escrow, and it’s just about to fall out, and this buyer is gonna back out. There’s three lawsuits against the sellers, and it’s all tenant lawsuits over issues with the buildings.” There are these predator law firms that all they do is look for vulnerable landlords, and they’ve found this team — I think this was a partnership that was running this; it might have even been a syndication… And he said “They’re trying to manage it themselves. It’s 36 units and they’re not addressing things, and this “predatory” law firm has found a gold mine in this building, and they just keep issuing lawsuit after lawsuit, and they’ve won the first couple, so they’re emboldened.”

I was fascinated by this, and I was just thinking “Well, he’s not gonna be able to sell and pass on his legal liability to anyone else.” He was like, “Yeah, you’re right.” I was like, “I’m interested in this. Keep me in mind. Let me know if this seller backs out.” So I went and immediately called my lawyer. I said, “Hey, can I do this?” I told him the situation and my lawyer was like “Yeah, you can absolutely do this.” He’s a multifamily investor as well. He said “You need an indemnification agreement. I’ll look at it and I’ll make sure it’s bulletproof.”

I called my insurance agent, and I said “How can I protect myself?” He said “You’ve already got an umbrella policy, you’ve already got liability… We’ll just boost your amounts on this and we’ll be prepared if you end up in that situation.”

I called my property manager – they’re multifamily investors, too – and I said “Do you think I could do this? This is the situation”, and they said “Yeah, absolutely. We’ve bought these types of buildings.” They’ve been in business for like 50 years. These are good opportunities. They said “This is how you do it. The problem is the current owner is trying to manage it themselves, and they’re exposing themselves to, obviously, the litigation that is happening.” He said “Oh day one we send an e-mail to all tenants saying “All issues have to be submitted by e-mail, in writing, and we’ll address everything.” Once you have a paper trail, that’s your defense against these lawsuits.” He said “There are those law firms out there that smell blood with these buildings, but if you just dot your i’s and cross your t’s, they’re gonna realize that you’re not a good target for them. They’re not gonna get very far, and they’re gonna move on and look for someone else.”

So that’s what I’ve done, and I bought that. That was now five or six months ago, and I’m very happy. We’ve increased the income a lot… I bought it at $178/square foot. It’s probably twice that, I would say, in this area, because this area is getting very hot… So I’m hopeful.

Joe Fairless: How much was it? What was the total purchase price?

Mark Hentemann: The purchase price was listed at 4,5 million. I bought it for 3,95, and it was already well priced at the 4,5 million dollars.

Joe Fairless: I noticed when you were calling your team, the one team member you didn’t mention that you called was your lender. Did you pay all cash, or did you have a loan on it?

Mark Hentemann: No, I did. Sorry, I skipped them.

Joe Fairless: They’re not that important, are they?

Mark Hentemann: [laughs] No, he’s great. I use the same loan broker; that’s what I’ve fallen into. He’s really good, and I’ve used him a lot. I called him and I said “Can I get financing on this?” and he said “Over the years we’ve put you with seven different lenders, and there’s this one lender – they’re good with these types of properties. They don’t have the issues that others do.” He kind of knows all the lenders. He said, “Let me make some calls. I’ll float it by them informally.”

He called me back and he said, “I think we’ve got a great chance of getting them to finance this”, and ultimately, they did.

Joe Fairless: Do you remember the high-level terms of that loan?

Mark Hentemann: The high-level terms? Yes, it was 25% down, 75% LTV. I think it either a 3,75% interest, or 4% even, and it was for a five-year fixed.

Joe Fairless: Were you planning on refinancing it after you get it turned around?

Mark Hentemann: I think so. That’s the pattern that I’ve fallen in with almost all of my buildings – I like five-year fixed. Maybe I’ll fine-tune my process at some point; I’m kind of working on this now. I don’t know if other people have done this, but I now have enough buildings, enough equity – across my primary residence, I have a second home – that I’m looking into getting an equity line that is substantial. I currently have one that goes up to like 1.2 million, but I would love the ability to close with an equity line, do value-add, and then put on longer-term financing.

Thus far, I’ve always bought with long-term financing upfront, done my value-add, and after five years I’ll either refinance and pull cash out to buy a new building, or if it’s a smaller building, I’ll sell, 1031, and get into the larger unit mix.

Joe Fairless: Once you closed on the property, you’ve got all the team members in place, what was your primary focus to make sure that everything was headed in the right direction?

Mark Hentemann: Well, with this specific building I was calling my property management company almost every day, because I know they have a lot of buildings that they’re managing, and I said “Remember, this building has issues.” Through the broker, I said “Hey, do you think I can talk to the seller or his team?” I was able to do that, and I talked to their asset manager and I said “What’s the deal? What was happening there?” She was very helpful and honest, and she’s like “We made some mistakes, but what had happened is that this law firm was using one or two people in the building as their point people, and they were getting them to rally the other tenants and get them to participate in these lawsuits.” She said “If you can buy out these tenants and get them to move out…” Obviously, L.A. has rent control and restrictions, so she said “If you can find a way to get them out of the building, I think you’ll solve 90% of your problem.” So that became a focus.

One of them just stunningly – and pleasantly surprised – move out on their own. Then the other one, it took about five months. I think we bought them out. It wasn’t a huge amount of money, but I was relieved to have that happen. And since then, I monitor that building. I said, if I ever get a notice to comply that comes from the city, I call them immediately and I say “What is this? This needs to get corrected immediately.” And just kind of staying on top of it.

Joe Fairless: This deal seemed like quite a challenging deal, especially for your team. Has there been another deal that was equally challenging?

Mark Hentemann: If I go through my history, equally challenging — that first duplex I bought felt that challenging, just because I was new. But in 2008 — I thought the market was really heated in 2004. I actually thought it was too heated in 2000, when I bought my duplex, but I was brand new, naive, and didn’t know much. But as the mid-2000’s progressed, in 2004, 2005, 2006, every year we were setting new records for building values, and I was like “Oh god, I don’t know if I should stay in or get out.” I was being very cautious. In 2008 I bought a building, and I convinced some of my co-writers on family guy to go in it with me. I was like, “You guys gotta get into real estate investing!” I’ll tell that to anybody; whatever your job is, start building that passive income. It’s been the most amazing hedge against a career in the entertainment industry, and a way to build wealth that makes you just feel a lot more secure as you’re going through, particularly in my instance of volatile industry.

So I brought these people on in 2008. While we were in escrow right after we removed contingencies, Lehman Brothers crashed and the whole economy collapsed. I was like, “Oh, no…! Right when I bring these smartass friends of mine that I see every day into this thing, after evangelizing to them about real estate, I’m gonna lose their money.” That was trying…

Joe Fairless: Did you close?

Mark Hentemann: I did close. I had removed contingencies. This building was distressed… I had this — not to go up on a sidetrack, but in an early stage of a market boom, I tend to buy more premium assets; that’s the only time I’ll ever go for B+, A- properties. But as a boom market matures and gets late in its stage, I get cheap; I just go for the cheapest buildings, because I just want to be protected. I imagine that the world is gonna collapse. There’s gonna be a collapse; or not a collapse, but any kind of correction.

In the mid-2000’s, when I saw the mortgage issues that were going on, I thought it could be severe, so I bought in a working-class neighborhood a very bread and butter building, that was mismanaged… This is the only other time I bought from sellers that were suing each other; these sellers were suing each other. But there were a lot of things — it was a great value-add opportunity, so I closed. Long story short – I closed, despite the circumstances, and I’m sure that the value declined, but we just kind of rode it out. I did not see a huge fluctuation or drop in rents that we were receiving; I think it was because we were that kind of middle of the road, very working class. Their incomes hadn’t spiked during the boom, and I think the profile of the tenants was they were in industries that weren’t impacted as strongly by the recession. So we rode it out.

Joe Fairless: You held on to it and you still have it today?

Mark Hentemann: I sold it in 2015, and thank god, I gave my partners a triple return of what they had invested. I happily sent them an e-mail with the stock market performance during the dates that we owned it.

Joe Fairless: [laughs] I love it.

Mark Hentemann: I think the stock market returned 48%, and I gave them 199% percent return.

Joe Fairless: What’s your best real estate investing advice ever?

Mark Hentemann: From my perspective, I have a job that I like; I love it. I’m still doing what I wanna do, but man, investing in real estate made my job so much more fun, because it took away the anxiety, it took away the stress, the uncertainty of it… It’s been, like I’ve mentioned, the perfect hedge against a career in any volatile or uncertain industry, and it seems like every industry nowadays is uncertain. The economy is changing, technology is changing things so rapidly that I would advise anybody, as early as you can, start investing passively.

If they are not inclined to roll their sleeves up and manage these properties themselves, they could become a passive investor with someone like yourself, as I do. I wanted to participate in the Texas market, so I’m excited about that, to be working with you… Get in the game, but be careful right now; there is going to be some kind of correction, I don’t know when; nobody knows when, but the cycles are pretty predictable.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Mark Hentemann: Best ever book recently – Sapiens, by Yuval Noah Harari. I don’t know if you’ve heard of it, but he’s a scientist and he explores where the human race has come from and where it’s going, and in the process gets into everything, like economics, and religion, and all aspects of society. It’s really fascinating. It’s one of those rare books where it’s relentlessly thought-provoking and mind-blowing. On every couple pages I just had to stop and be like “Wow, I can’t believe that.”

Joe Fairless: What’s a mistake you’ve made on a transaction?

Mark Hentemann: A big mistake was the story I just told – don’t go into escrow… I can identify a mistake that I made in that transaction, which might be familiar in this day and age – I had started to pull back from my investing in maybe 2006, and I watched the market continue to set new records in ’07 and ’08. I had some money and I was like “I’ve gotta get back in.” I wished there was a small correction so that I could jump in, buy on a correction, enjoy at a discount and then ride the market as it continues to go upward, which it had been doing for ten years; you’re starting to get numb to it, and thinking it’s gonna go on forever.

So when the market had a little dip in early 2008, I got excited; it dropped 10%, and I’m like “This is the time to get in”, and that’s where I jumped in on this building. However, I think that happened to a lot of people that were waiting and they were trying to be patient, but the market just kept going up year after year after year in the mid-2000’s, and my mistake, to summarize, is I mistook what I thought was a temporary small correction on what would continue to be an upward climb. I was at the tip of the waterfall, and it was gonna go down.

I think that’s a tempting thing to do for a lot of people in a market like there is today, where prices have been going up. I guess the silver lining is I’m thrilled that what I did buy had solid fundamentals, so… Keep that in mind.

Joe Fairless: And how can the Best Ever listeners either get in touch with you or learn more about what you’ve got going on?

Mark Hentemann: They’re welcome to e-mail me, it’s my full name – markhentemann@me.com. If they wanna reach out, I love talking to other investors. If they’re local and I have the time, I’ll meet up with them. I’m in joke-writing comedy world all day, so I love interacting with real estate investors.

Joe Fairless: And adults, having adult conversation?

Mark Hentemann: [laughs] Exactly. People that could talk finances.

Joe Fairless: Right, right. Well, Mark, thank you so much for being on the show. Thanks for talking about how you got started, and I’m glad I asked about the last deal, that 36-unit. Really interesting. A lot of lessons learned on that, as well as the types of team members that you brought in, made sure that they were on the same page prior to you entering into the fray… And the 2008 property – you bought it at the exact wrong time, but you weren’t forced to sell, therefore you did pretty darn well with you and your investors; almost a 200% return to the people who you were partnering with… That’s a good lesson, especially for anyone now who’s buying and they’re anticipating a correction, which I believe they should… Buying the right way, buying for cashflow, buying with debt that is long-term and having adequate cash reserves so that you can ride out any type of storm that might come your way.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Julie has self published her own books, as well as helped a lot of other people publish theirs. When she published her bookMore Than Cash Flow,it went to #1 overall on Amazon. Today she’s here to tell us how we can use books to build our brand for us. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, I’ve got a special segment for you called “Situation Saturday.” The situation is this – you’ve got a company and you want to build that company’s presence, so that you can make more money, so that you can get more customers, and then in turn make more money. Today’s best ever guest, Julie Broad, has done just that by publishing a book, and she has recently launched a venture called Book Launchers, which helps entrepreneurs and professionals build their business with a brand-boosting book. We’re gonna talk about how to do that if you are looking for more customers and ultimately more money from your business. How are you doing, Julie?

Julie Broad: Hey, I’m good! Thanks for having me.

Joe Fairless: Yeah, my pleasure, nice to have you back on the show. Best Ever listeners, you might recognize — you definitely recognize her name, because you’re loyal and you remember episode 1084, titled “From living in her parent’s house (sounds like fun) to complete lifestyle freedom through real estate investing, with Julie Broad.” So if you wanna hear her best ever advice, then go listen to episode 1084.

We’re gonna be talking about how to publish a book to build our real estate brand. Julie has published a book that got the distinction of being Amazon’s number one best-selling in one category, which is the book called More Than Cashflow, and she is an entrepreneur and a real estate investor who was awarded a Top 20 Under 40 award.

With that being said, Julie, will you give the best ever listeners just a little bit of background, real quick, about who you are and what you’ve been focused on? Then we’ll jump right into building our brand through books.

Julie Broad: Yeah, you bet. So as they know if they’ve listened to the best episode, I started investing in real estate in 2001. The first book I wrote, I wrote and published in 2013, after Wiley turned me down. There’s a couple parts that are really cool about that story. First, which is kind of funny — it wasn’t cool at the time to be completely rejected; it was really hard on my ego. But looking back, one of the things was they actually told me that this book idea wasn’t very good. Not in those exact words, but they were like “It’s been done before, it’s already out there.” Then they worked with me on another book idea, and in the end they said “You know what, we don’t think that you have a strong enough marketing platform to sell books.” So then it was full stop, like “We’re not gonna work with you.”

So it took me about a year to get over it, because I really felt like I needed that gatekeeper to tell me my idea was good, and they said it wasn’t, so it took me a while to kind of go “You know what, I’m gonna publish it.” And the part that’s really cool is this book went to number one overall. So it wasn’t number one in a category, it was number one in books, period… And that’s pretty epic for a self-published niche real estate book to do. I was ahead of Dan Brown, ahead of the Game of Thrones series as a print book on Amazon.

Joe Fairless: Just so I’m understanding – you were number one in all of the printed books on Amazon?

Julie Broad: [laughs] Which is why I wanted to make the distinction, because I don’t wanna say it’s really easy, but there’s so many gimmicks and ways to guarantee that you can be a best seller in a category nowadays… And it messes things up if you do it that way, or you can go free, but then can you really call yourself a best seller if your book was free? It’s kind of one of those things, I’m like “It’s the best freebie.” [laughs]

Joe Fairless: Right, yeah.

Julie Broad: Yeah, so I wanted to make that very important distinction. So after that happened, I had a lot of people who had book deals and were working on self-publishing start asking me questions, and I worked on a ton of different books as a side-hobby; it wasn’t even a side-job, I was doing it for free, just because I loved helping people and loved the book industry. So a little bit by bit, that led me to creating a company where I can hire all the amazing people that helped me when I created my book, as well as hiring even better people now that I’m in Los Angeles, which is kind of the hub of creative and phenomenal talent. I’m able to attract really great people to work on my client’s books, which is what I do now – help people write and self-publish and then sell their books. So yeah, it was a fun journey from real estate to book publishing, but books have been in my blood since I was a kid.

Joe Fairless: Yeah, and I’m really interested to hear how you got to number one, because I’m on Amazon right now, and I’m looking at your book page, and it’s ranked 649,668 in all of books. So it’s now over 500,000 ranking, but before you said it was number one. So how did you get to number one and how come there’s a discrepancy?

Julie Broad: Two distinctions. Number one, this was in Canada, so on Amazon.ca. Definitely a little bit less competition, so a little easier, but not much easier. So that’s discrepancy number one. Discrepancy number two is this was 2013. So this was five years ago that this happened… Which also helps the fact that — there were a couple things that helped, and it’s luck; I would never ever promise anyone that you could get to number one overall, because it just happened nobody else was launching a really big book that week. If I was competing with a big name, like a Tim Ferriss, or even another Harry Potter book or anything like that, there’s no way I would ever hit number one overall… And you can’t control those things. It’s kind of like when a movie hits the box office. You can’t really control what you’re competing with all the time. And you also don’t know what’s going to work out.

So the reason though that my book went to number one was I had a few really key people who jumped on board and supported it… And there was two reasons for that. One was that I had spent years building relationships and had people that were going “You’re writing a book? I’ll help you”, and they had people who had the exact audience that I needed to reach. They had real estate investors and people who wanted to invest in real estate in their audience… And I also wrote a book that, just by what Wiley said, it was not like the other books. I was not teaching you how to be rich in real estate or how to make money, I was actually saying “Hey, listen, there’s a lot of stuff that makes you maybe not want to invest in real estate”, and I was telling the stories of our manslaughter in a crackhouse, or our property manager that got charged with manslaughter, or a property manager who stole money from us, tenants that pulled knives on each other. I was telling all of that stuff, saying “Hey, listen, this is some of the stuff you don’t hear about, and if you still do wanna invest in real estate, here’s how to avoid most of those things from happening.”

So it was a unique spin, plus I had a lot of support from a lot of really influential people in the real estate space in Canada.

Joe Fairless: I love it. So three things I took away from that. One, don’t compete with other book launches, even though we might not be able to control it… Ideally, we don’t compete with other book launches. Two, partnerships, and three, having a unique spin. Are those basically the three things that you just mentioned?

Julie Broad: Yeah, it was perfect. You can’t control the not competing with other books, but I think if you’re unique and you’ve got a lot of support — and by the way, Oprah didn’t call. My book went to number one, and Oprah didn’t call. So if your book doesn’t go to number one, it’s okay, as long as you know why exactly you’re writing your book.

I have some clients who don’t rank on Amazon, but they’ve sold thousands of books, and they’ve sold it through bulk sales, and they sell books to associations, or as part of a speaking package. So it never ranks on Amazon, but they’re actually selling a ton of books and getting in the hands of readers who can become clients, which is their goal. They wanna drive business, so it doesn’t matter to them. The dopamine hit you get by posting on Facebook that you’re a best-seller – that feels good for a day. But getting business for two years as a result of your book – that feels good for a long time.

Joe Fairless: I completely agree, and if we do anything for just the sake of accomplishing a metric, then it’s not sustainable. We’ve gotta really want to be in it for the long haul. So let’s dive into number two and number three, because not competing with other book launches – maybe, maybe not; we’ll just see depending on when we launch. But number two and number three we certainly can control – partnerships and having a unique spin. Let’s dig into partnerships. What specifically did you do to climb to number one in Canada on the best sellers list?

Julie Broad: There was three things. One of the partnerships was finding people who would give me things for my launch week… And one of the powerful reasons that it was so strong of a launch is that I had some very valuable giveaways; stuff people would have otherwise paid for. One of the things that was a little lucky, again – which is why I say you can’t repeat this – is a former mentor of ours, he had left the real estate space that year, and he had a really great course that used to sell for $299 that he had just taken off of the market, and he said “Hey listen, for a week I’ll let you give this away for anybody who buys three or more books.”

So I had a $300 course that was genuinely off the market, and people really saw value in it. It fit with my book. It was basically “How to invest your retirement funds into a 401K (in the States) or an RST (in Canada).”

And I had a couple other really relevant things that were giveaways…

Joe Fairless: Like what?

Julie Broad: Honestly, I don’t remember one of them. I know it was an eBook. Another one was all about dealing with tenants. So it was like a checklist and a package; it was a tool. It would have only sold for $50 I think, but again, the person who gave it to us did sell it on his website for $50, so it had real, tangible value. So it was about a $500 package that we put together, that was just quality content related to real estate investors or people trying to decide. There was this property evaluation spreadsheet, how to calculate the cashflow and figure out your mortgage and all that kind of stuff… So those kinds of things. So really high value, and that was partnerships; I promoted them as much as I possibly could around the launch, but it was relationships. So that was part of it.

Part of it, of course, was getting people — so I had mortgage brokers and realtors who bought lots of books to give to their clients, and then I had a couple of really key organizations who have thousands and thousands of real estate investors in their audience promote not just my book, but this giveaway package. So they were incenting their members to buy three books to get this package, so you get a thousand people buying three books, you get 3,000 book sales in a day, and that starts to pop you up really high. And all it was was I think three or four different strategic companies that promoted it, but they had 35,000-40,000 real estate investors, so really targeted people in their audiences, and that really was the secondary piece. But the key to that isn’t that I contacted them a month before the book launch and said “Hey listen, this is going on.” The key to that was that I’d been building relationships for years with most of those people.

Joe Fairless: It’s so smart what you’re doing… You’re reaching, one, the packaging of all this content, so that you buy a book for less than $30 and you’re getting a value — whether a $500 value is $500, maybe it’s $50, or maybe it’s $1,000; it depends on if you use it. But $500 worth of content that is valuable… So the value exchange was tremendous, plus you’re reaching the gatekeepers. How did you confirm that the individuals purchased three books in order to receive that $500 package?

Julie Broad: [laughs] This was a pain in the butt. So I hired a VA, so I had a VA from the Philippines on my team at the time, and people had to submit a receipt to prove it, so… [laughs] So that poor woman, for an entire week — actually, I think it took her two weeks to sort through all the orders… But the cool part of that was two things. So we ended up getting a huge database of people that we knew bought my book, which made my second book launch even better; not better than the first, in that I didn’t hit number one with my second book, but I knew I had book buyers. I also knew I had people that were willing to put out $90 or $70 to buy three books. So we got their names and e-mail addresses. We didn’t market to them unsolicited, just so you know, but it was part of the reply back that she sent.

So she had to process all of them… I don’t actually know if there’s a good automated way to do this to this day, but that’s how we did it. We had people send in the receipt in order to get the package.

Joe Fairless: Did you put that e-mail where they send in the receipt in the book?

Julie Broad: No, because that package was only available for launch week…

Joe Fairless: Oh…

Julie Broad: After that launch week, you could get — there’s like a checklist and a few other things that we still give away… But the book just directed you to a web page specific for the book, and then you can submit there. And truthfully, on that page we don’t monitor the thing anymore… It asks for the page number where you were told to go there… But really, I scan it every once in a while and I’d say like 4% of the people have the page number wrong, so they just guessed to try to get the freebie… But I really don’t care at this point.

Joe Fairless: Sure, yeah.

Julie Broad: You know, take the freebie and run. I don’t need to pay somebody to monitor… [laughs]

Joe Fairless: Yeah. So now it’s automated… After launch week you then have a call-to-action that is in the book that is automated, where they receive something in exchange for — oh, they just have to list out the page number, and then they get the stuff?

Julie Broad: Correct, yeah.

Joe Fairless: Okay.

Julie Broad: And there’s three different page numbers in the book where they could have got that link.

Joe Fairless: Oh, cool. Very cool. And that’s just automated… And what are you giving them there? I’m just curious.

Julie Broad: This was five years ago [unintelligible [00:16:15].15] I’ve done a lot of book projects since then. [laughs]

Joe Fairless: Hey, you brought it up…

Julie Broad: I know. I know for certain there’s that spreadsheet I mentioned that evaluates cashflow on a property…

Joe Fairless: Cool, alright.

Julie Broad: I know that’s one of them for sure.

Joe Fairless: Cool. Alright, good stuff. That is so interesting. So one, you’ve built the relationships along the way; it’s not just a month prior, it’s the good karma and the goodwill that you’d done for others, and now you’re cashing in a little bit on that. Two is of all those people you identified some gatekeepers who have large audiences, both organization leaders, as well as people who have a platform, like e-mail (large lists) or a podcast, something like that… And then you promote the heck out of the package, which also is involving those individuals in the first week, so they wanna promote it, because they’re getting their stuff out, too. That’s beautiful. That’s so smart.

Julie Broad: Yeah, it worked wonderfully… And then, of course, they felt great because their audience was so grateful to know about this great deal. So it worked out really well, because it really was high value and relevant to the people. I think that’s really important. I see a lot of book launches where you can get a lot of free stuff with the book launch, but it’s really not that relevant to the person who would want that book. They key to that is stuff they would otherwise pay for happily. So you’ve gotta find that stuff that they would otherwise be paying for and would be forking out money for, because then they’ll see real true value in it.

Joe Fairless: I love it. Anything else as it relates to launching a book that you did or do that you wanna mention?

Julie Broad: Have an endgame plan, know why you’re doing this… Because a lot of our clients think “I’m just gonna help people and it’s gonna grow my business”, and if you’re not strategic about it, you miss opportunities in the book to either build credibility or even let people know what you do… A lot of people write books because they wanna paid speaker, which is smart; it really opens the door and adds a zero to what a lot of people will pay you to speak if you’ve got a good book, but for goodness sake, put it in a book somewhere, talk about a few of your talks; seed the ideas that you want to put out there in the world. People mistake this; they write the book and they think it’s all about them, like it’s their story, it’s their advice, it’s their experience, but the book isn’t for you, the book is for the reader. So really make sure that you’re focusing on what’s in it for the reader.

Don’t ever tell them a story that doesn’t give them a benefit or a lesson. You don’t ever want somebody to go “Well, that was a good story, but why did you make me read it?” And that’s really core to the book and to the success, and to having other people wanna share it. Because other people really wanna look good for sharing it, and if it’s just about you, it doesn’t make them look good for sharing it; but if it’s all about benefitting the reader, then it makes them look good for sharing it.

Joe Fairless: Yes, absolutely. Isn’t that true not only in books, but also in any type of content creation?

Julie Broad: One hundred percent, yeah. One hundred percent.

Joe Fairless: Anything else that we should keep in mind or do best practices for book launches that you can think of?

Julie Broad: For book launches – again, I think it’s really about that ideal reader. When you start writing, know who you’re writing for, and get clear on that, so that when you do go to launch, you know exactly who has the same audience. So again, I was a real estate investor writing for people who were thinking of investing, or who had started investing and it wasn’t going well… So clearly, not every realtor is my target market, because some realtors only work with homeowners, the people who wanna live in their home, period. But realtors who work specifically with some real estate investors or want to attract more real estate investor clients – they have the same audience.

We have somebody who’s in the fitness industry, she talks about a couple different fitness programs and raves about them in her book. Now, they’re a great potential promotional partner. But think about that in advance, like who would you like to promote your book for launch, and is there a way that you can make it appealing to them, maybe by talking them up in the book, to be strategic that way… To say “Hey listen, I gave you a shout-out and here’s the chapter where I included something about your business, and your audience might wanna know about this.” If you can be strategic, it’ll make your launch so much stronger.

Joe Fairless: Yeah, this is so smart by doing this all through partnerships… I am asking some pointed questions because I am about a month and a half from launching a book, so… [laughs] So believe me, I am taking a lot of notes right now, on my silent keyboard; I’ve gotten a lot of hot water for having a noisy keyboard and I switched up computer keyboards. I got a lot of flak from listeners. So I’ve taken a lot of notes on my silent keyboard and this is incredibly helpful. So… Selfishly, what else should I do?

Julie Broad: Okay, great. I’m glad you asked, because now I have a timeline – so six weeks out is like THE time to start lining up media, podcasts and any kind of external support that you’re hoping for. A lot of people throw their book out, or they’re about to put it out in a week and then they try to do this; we always work with our clients 6-12 weeks out from launch. So you’re at the critical point, and you know this, because you have a podcast, and I don’t wanna spoil anybody’s world, but most podcasts get booked like six weeks to three months in advance, and then they record them, and they don’t always put them out the day they record them. Sometimes it’s the next day, sometimes it’s a month later… So you really wanna plan ahead and talk to the podcasters and say “Hey listen, I’ve got a book coming out this week. I’d love to get the podcast out around that time… What can we do?” So now is the time to be doing all that and being strategic about who is the most important for you to reach out, and putting that launch package together and really trying to create something fantastic…

And try to come up with something unique for a launch event. A lot of people will do a boring — at the local library, or even the local bookstore… What I did for my second book – I did burpees for books, and I did a live-streamed event from my local cross-fit gym, where everybody who bought a book, they got to watch me do three burpees for every book that was purchased during this live stream, and then I gave a whole bunch of money to charity for every single book sold. And I didn’t make money that day from book sales, but I got exposure and I got some media attention from the local media.

So do something fun and unique that people are gonna tune into, whether they wanna buy your book or not, because that will get people paying attention to the fact that you even have a book coming out.

Joe Fairless: Yes… The burpees for books – did that tie into your second book at all, or was that just kind of something that “burpee starts with a B, and book starts with B, and it rhymes, and it’s a little silly, so I’m gonna do it”?

Julie Broad: [laughs] Well, it was unique in that, but inside of my book — my second is the The New Brand You, and it was really about how we built a brand that raised millions of dollars for our real estate investment company, and then also how we built a brand to grow our real estate training and education company, which is what I did before Book Launchers.

The inside of that book though – I actually talk about cross-fit quite a few times, for a variety of different reasons… So it wasn’t a direct tie into the title, but it actually has a tie-in when you read the book – you learned about some of the things, the life lessons and the branding lessons I learned through cross-fit and the people that I surrounded myself with in my cross-fit gym.

Joe Fairless: Beautiful. So if someone works with you or your team at Book Launchers, what do they pay and what do they receive?

Julie Broad: We’re a monthly membership, and our prices are slowly going up on a regular basis. I would say the best thing to know what we’re charging when you’re listening to this is to go to BookLaunchers.com. You can work with us at any point in the process. We like to work with people sooner rather than finished, because then we can help guide some of these things I’ve talked about – making sure you’re putting it in your manuscript, so that it really is gonna be easier to market it and get the strategic partnerships and get it out there.

Then when you work with us, one professional works on your book at a time all the way through to the end, where we have a marketing team that works on your book. I always say we market with you, because some of these things are your relationships, and that’s going to drive the best results… But if it’s cold reach, we have a phenomenal book marketing pro who worked as a literary booking agent for years, and she’ booked authors and many people on speaking engagements, media tours, podcast tours, all that stuff… So she works on your book and pitches ten outlets a month; we even do some pitching to try to get you bulk deals, too. We might sell 200 books to a real estate association, or to a different organization, or sometimes colleges and universities will buy bulk…

So we’re working on all kinds of angles, trying to figure out where your ideal people are, and how we can get your book in front of them.

Joe Fairless: Outstanding. How can the Best Ever listeners get in touch with you and learn more about your company?

Julie Broad: BookLaunchers.com is the best way to learn about the company. If you want to chat with me and ask questions, I hang out on my YouTube channel all the time, so BookLaunchers.tv takes you straight to my YouTube channel, which has tons of tips, and it’s also like a passion project for me, so I pretty much respond to every comment.

Joe Fairless: Well, Julie, thank you so much for being on the show and educating myself, as well as others, who are launching a book or looking to launch a book. Best Ever listeners, if you’re not launching a book right now, that’s okay, because I’m sure you’re listening closely, and what Julie talked about is applicable to our real estate investing and partnerships, and just in general acquiring customers… And in particular one aspect of what she was talking about, the partnership angle – identifying people who would help you build your business and working with them simultaneously to partner up, and they’ll build their business. So whether it is a real estate deal where you can bring in a partner, and then together you two can go bigger and better, or something like content creation, like we were talking about…

Many, many lessons, both general and specific, and I’m very grateful that you were on the show, Julie. I hope you have a best ever weekend, and we’ll talk to you soon.

Bo got his start in real estate with the famous “house hack” method. He rented the extra bedrooms of his single family home. After that, he started acquiring income properties and now owns 6 rentals, all acquired in the first 6 months of his investing career. To hear how he’s been able to hit the ground running, tune in to this episode!If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Bo Kim. How are you doing, Bo?

Bo Kim: Doing well, Joe. Thanks for having me. How are you?

Joe Fairless: I am doing well, and it’s my pleasure, and looking forward to our conversation. A little bit about Bo – he started investing by renting his three-bedroom house, then he connected with local investors who invest out of state; he now has six rentals in six months of investing. He’s based in Los Angeles, California. With that being said, Bo, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Bo Kim: Yeah, for sure. My name is Bo, and during the day I work as a consultant for a CPA firm here in L.A. I’ve been in accounting for about five years, and on the side I’ve been slowly learning about real estate investing and getting into rental real estate. Like you mentioned, Joe, the way that I kind of fell into this was about two years ago I bought my primary residence in the suburbs of L.A. It was a modest 3-bedroom 3-bath townhome that I was able to rent out one of the rooms and create that steady cashflow, and it kind of opened the eyes to passive income and wanting to grow that passive income… So ever since then, I’ve been kind of reading books, listening to audio books, going to meetups like a madman, and trying to figure this all out, and it’s been an incredible journey thus far.

Joe Fairless: You’re a consultant for a CPA firm… How do you apply your area of expertise as a consultant role into what you’re doing now as a real estate investor building your own portfolio?

Bo Kim: A great question… I think it fits in perfectly with what I’m trying to do with rental real estate, just because as an accountant I’m a numbers guy, and I’m really into analytics and kind of measuring the different metrics. So there’s hacks in audit, and then there’s a consulting arm, so I’m not the guy to go for tax advice, but I typically work with a lot of companies who need systems and processes built into their company… Anywhere from inventory to revenue, to payments, things like that. I go in there and I look at the current environment and I make recommendations, how to streamline operations and things like that.

So what I did when I started out was immediately I recognized that hey, if I wanna scale this business out and I wanted to really treat this as a business, I needed to come up with systems and processes from day one, so that after each property under my belt, things were just gonna start to get easier. So I think from that perspective it’s really worked out well.

Joe Fairless: What have you implemented?

Bo Kim: Anything from checklists, from what I do from a due diligence standpoint, I have reminders, there’s different things that I will check cross-reference with county records or with maybe two different brokers or PMs… Things like that I’ve implemented. I always like to call them “controls” to make sure that I mitigate the risk as much as possible, what things could go wrong.

Joe Fairless: So due diligence checklists… What are some other checklists that you have?

Bo Kim: When I study a market or a property, and also when I’m running some of the cashflow numbers, I like to normalize the cashflow expenses by checking different references… Now that I’ve started to do the BRRRR method and tried to flip those properties to myself and create that appreciation, what I’ve been doing is getting different brokers to give me a market analysis, so I can get a better idea of the comps in the area… Little things like that, I’ve tried to implement systems.

Joe Fairless: You’ve got six rentals in six months – is that accurate?

Bo Kim: Yeah. I closed on my first one in late January, and I closed on my sixth one in July, so it’s been six months… But before I closed on my first one, I was reading books and studying for about 2-3 months, I would say.

Joe Fairless: Okay. How did you develop the comfort level to purchase that amount of properties in that period of time, across different markets?

Bo Kim: I think that was the biggest struggle for me. Being an out-of-state investor, right from the get-go I’ve talked to people in the local meetups or on Bigger Pockets. There were some mixed reviews; some people who tried it and they were burned, so they weren’t gonna go back to the [unintelligible [00:07:52].23] or other people were like “Why don’t you stay local? It’s much better.” So there was a lot of kind of noise for me to have to navigate through, but the way that I saw comfortable doing all of this was definitely researching and researching… And a couple local investors who invest in Indianapolis and Kansas City really kind of took me under their wing and kind of showed me how they did it, and then sent me to their contacts…

So immediately after I put a property under contract, I took their advice and I flew out to Indianapolis and Kansas City, and I think that was the biggest game changer, because it really helped [unintelligible [00:08:35].20] my expectations of the different markets and how it differs from California, and really helped me build the trust with the local boots on the ground, with the brokers, the wholesalers and the property managers… Because I really took it to hear when they said “You buy a property once, but your team you work with for the long haul”, so I wanted to make sure I have a team that I trust in place, and I think I do today.

Joe Fairless: What type of financing did you use to secure the six properties, if any?

Bo Kim: I definitely used a mix of financing… I’ve used conventional Fannie Mae mortgages, I’ve also used a HELOC, I’ve also used a 401k loan to purchase one all cash, and lastly, I’ve also used a private lender to do the BRRRR method and refinance, so a delayed cash-out refinance Fannie Mae product. But my ultimate goal, at the end of the day, once the properties are stabilized, is to convert them into Fannie Mae loans, fixed 30-year rates, until I hit the ten threshold.

Joe Fairless: You said once they get stabilized, so what condition are they in right now?

Bo Kim: For the “turnkey” products – I don’t know if the Best Ever listeners use turnkey, but these are properties that were distressed, but a provider has fully rehabbed and there’s a tenant in place… For those products, I just typically finance them with 20% for a single-family residence, but if I’m doing the BRRRR method, I will buy them cash with private money, or with a 401k loan, and maybe put in 10k-15k worth of work to spruce up the place, and then I’ll get an appraisal six months later to refi those out.

So when I’m saying stabilized, during that six months making sure it’s nicely rehabbed, it’s got a tenant in there who’s paying, and I’m kind of ready to refi.

Joe Fairless: How are you finding the properties that have the equity going into them where you then renovate and you still have the equity difference than you can refinance and get your money out?

Bo Kim: I would definitely say the guys that I mentioned earlier, who took me under their wing – they’ve been investing in those markets for 2-5 years, and they were telling me both it’s a hot market; it’s definitely different from when they’ve first started, and I kind of like to use the 70% rule, meaning I want to buy a property all-in, purchase price and rehab, 70 cents on the dollar, but I’m realizing that’s really hard to do in this market, so I’ve kind of lowered the bar actually to 75 cents or 78 cents on the dollar.

What this allowed me to do is still get a little bit of equity and pay maybe half the price that I would have paid for a turnkey property, and kind of be in that control… But the caveat to that is I’m taking a little bit more of the risk on my side, to make sure my after repair value is correct, and to make sure that the scope of work and the budget is correct.

Joe Fairless: Is that the primary success metric that you look at when evaluating an opportunity, that 70 or 75-78 cents on the dollar all-in cost?

Bo Kim: That’s not the only one. I would also look at the cash-on-cash. My rule of thumb is I wanna be at 12% or better cash-on-cash when I’m leveraged or financing the property, and also I’m looking at a debt service coverage ratio of about 1.2 or better… And rent-to-value ratios I’m also looking at 1.2 or better.

Joe Fairless: And rent-to-value is the value appraised it appraised at after repairs?

Bo Kim: Yes.

Joe Fairless: Okay, got it. Sorry, what was that ratio that you look for?

Bo Kim: That’s a good question. I think in terms of my bottom line, I think it depends, because I kind of have different strategies for these different markets… Just to put it in perspective, for Indianapolis I’m kind of targeting it because this is where my team focus is on – areas that are pretty closed to downtown, anywhere from 10 to 15-20 minutes from downtown. So I wouldn’t necessarily call it the suburbs… And I think these are good, working-class neighborhoods and I’m not banking on appreciation by any means, but it’s cash-flowing nicely… But there have been signs of gentrification in these areas, so that will be the icing on the cake.

As for Little Rock, I’m kind of focused on more of the B class, and I wouldn’t get into more rougher neighborhoods… But that’s the last market that I entered in, so I’m still learning. The cash-on-cash might be slightly lower than Indianapolis or Kansas City, but that’s a market that I just got into for similar reasons. Each of these markets has its pros and cons, but what I looked at was from a macro perspective, population is steady or growing, and jobs are growing, and it’s very diverse, and it’s also very landlord-friendly.

The last time I looked up landlord laws in Little Rock, I think if they are late on their rent [unintelligible [00:14:24].23] the whole process to have the sheriff escort them was only a couple weeks. I’m not a lawyer so don’t quote me, but that was based on some of the googling that I did… And it made me realize these are very favorable for the landlords, as compared to California, where I live, where it takes forever for an eviction to happen.

Joe Fairless: And what’s your play in Kansas City?

Bo Kim: Very similar to Indianapolis, actually… But for Kansas City I’ll go a little bit further into the suburbs, maybe 30 minutes from downtown. I would consider these still C class neighborhoods. In my opinion, they’re very blue-collar, hardworking people, and they cash-flow pretty well.

Joe Fairless: You have taken many different financing approaches – conventional, HELOC, 401k loan, and the private lender… Let’s talk about the private lender. How did you get to know him/her?

Bo Kim: This one was very interesting, actually… Him and I, we were both part of a Facebook group; it’s a private Facebook group for real estate investors, and we just talked via Facebook messages back and forth for a couple of weeks, just talking about deals, different markets and just getting to know each other. I’d never thought that he would be a private lender of mine for future deals, but I came across an opportunity… It was actually my first BRRRR deal, and I was going to use a hard money lender, but I was looking at all of the fees for hard money lender and I was just talking to this buddy of mine, saying “Hey, these are kind of high fees. The margins just might not be there for me to do a full out refi.”

I was just talking to him, and he was saying “Hey, I have a little bit of cash saved up… Why don’t I be your private lender? I don’t want you to lose this opportunity.” That kind of lit an idea in my head and we got a loan agreement; I had my lawyer friend look at it, it was all good, so we both signed it. He funded the purchase, and I funded the rehab.

We did that deal, and I actually ended up doing a delayed cash-out refi. The terms of the deal were that there will be interest-only payments for six months, with an option to extend for a couple more months, and then there would be a balloon payment for the principle. But within two months the rehab was done, there was a tenant in place and everything was good, so I talked to my conventional lender who said he can do a delayed refinance of 75% of the ARV, not to exceed the purchase price and closing costs. Basically, what that did was it left some of my money in the deal, maybe half of what I would pay for a traditional down payment on a turnkey, but also my leverage was only 60% when everything was said and done, not the 75%.

So I was really happy with the deal, and it really provided a proof of concept for me that I could rinse and repeat this even better.

Joe Fairless: What would be some things that you would optimize if you were to do this similar approach again?

Bo Kim: I think a couple things… I would definitely wanna understand the scope of work a little bit better. When I was initially doing this, I didn’t quite understand [unintelligible [00:17:54].22] I kind of learned as I went. Looking back, it may have been a pretty big risk on my part, but now if I were to do it again, I would fully wanna understand what’s being done to the property in terms of cap-ex items, because a month or two later we ended up replacing the roof… So I would just wanna make sure that hey, if we can do it all at once, maybe we’ll replace the roof at that time. Little things like that, but overall I was really happy with the product and I would gladly do it again.

Joe Fairless: The relationship(s) (I don’t know if it’s one person or multiple people) that you have with your local contacts, local investors, who then told you about what they’re doing in these other markets was critical to your success here, and opening up the door for you… How did you meet them initially?

Bo Kim: It’s funny… I just hit them up either via Bigger Pockets messenger, if they posted on a forum, or I actually just hit them up on Facebook, because they were also in a group that I was in… So if we were on a mutual group or I saw them post on Bigger Pockets, I would just private message them. And what really surprised me was how much these guys — generally speaking, 80%-90% of the people that I message for the first time without knowing them, they were really welcoming and receptive, and they were willing to share what they’ve learned throughout the years.

One thing I would add to that though was — I wanna share a quick story, if I may… Also I know you’re about the secret of living is giving, and I also believe that. Zig Ziglar said “You can have anything that you want if you help others get what they want, too…” So when I went to Kansas City back in February, what I did was I reached out to the locals here who had properties in Kansas City and I just offered to take pictures for them, or bird-dogged for them, or whatever value that I can bring as a newbie… I asked “Hey, what can I do for you?” without asking for anything in return.

A couple of them actually asked for me to take pictures of their properties in Kansas City, so I snapped a couple pictures for them, and what happened was at one of these properties, the owner of the next-door neighbor came out and asked me what I was doing… So I was telling him, “I’m taking pictures for a friend”, and she asked, “Hey, do you wanna buy my property, too?” I was like, “Sure, let me take pictures and get what’s your purchase price.”

So I took pictures for them, and I got a purchase price, and I passed that along to my friend. And I know if they ended up taking the deal, but I know they were super-thankful that I did that for them, and it just helped me realize that things roll and things began to click for me, and things began to work out really well when I decided to help others without asking for anything in return… So that’s kind of like a motto of mine as well.

Joe Fairless: I love that story, and just so I’m understanding fully, you said on BP messenger you’d message them, or on Facebook you’d message them because you were also in a group… So they’re not necessarily local people, they’re just people who you saw that they posted about investing, and it resonated with you, and then you send a follow-up message to them… Is that correct?

Bo Kim: Yeah, and some of them were in other states, but some of them were also local to me. I live in Southern California, so there are a couple guys in San Diego that I actually ended up meeting face-to-face for dinner; there are a couple of guys in L.A. that I met, and there were a couple of guys in Irvine, Orange County that I ended up meeting as well… So there were some locals, but there were also guys from Virginia, Washington, that are not local to me, but it had the same effect.

Joe Fairless: What’s your best real estate investing advice ever?

Bo Kim: My advice to the Best Ever listeners and people who are just starting out is, especially for a guy like myself, who is into the numbers and into the details, I think looking back, if I didn’t take action on the first one, I still may have been under the analysis paralysis up until this point. I kind of like to remember the game Telephone, where one guy passes on information to another, and another… And by the time it gets to the end user, sometimes the information is not 100% there, or sometimes it’s distorted. So when I’d talk to people and they were like “Don’t get into real estate investing, don’t do this, don’t do that”, I’d listen to them, but I also researched more and educated myself to mitigate the risk, but also to take action.

I like to challenge the people who reach out to me and ask “Hey, how did you do this?”, make sure you don’t fall into that analysis paralysis, and educate yourself enough and take that first step, because I think it’s way worth it.

Bo Kim: Yeah. I think it was my fourth deal, when I was buying all cash with my 401k. I was buying it from a wholesaler, and I didn’t get an inspection, just because I knew there was gonna be work that was needed to be done, so I ended up not doing an inspection… But there were little things here and there that I know that an inspector would have caught, instead of me just trying to walk the property and kind of see that visually.

At the end of the day, I knew that there was gonna be work needed to be done, and I budgeted for it accordingly, but I don’t know if that may or may not have changed my decision, or maybe I could have negotiated a lower price had I known that these little nuances or exceptions were out there.

Joe Fairless: Best ever way you like to give back?

Bo Kim: I like to respond to all of the different messages in the forums, and also the reason why I created a blog for myself is to kind of document my journey and be very transparent in terms of how I look at things, my thought process when I approach an investment, and just share that knowledge… Because as I mentioned before, the two guys who really kind of took me under their wing and shared their contact and their knowledge with me – I wanna be able to do that for the people who are just starting out as well.

Joe Fairless: Speaking of your blog, how can the Best Ever listeners learn more about what you’ve got going on?

Bo Kim: I’ve just created this blog, it’s at BiggerCashflow.com. You can also e-mail me at bo@biggercashflow.com. If you have any questions, if you just wanna talk rental real estate, or if you wanna meet up if you’re local… I always love to learn and give back to other people, as well.

Joe Fairless: You bought six rentals in six months, you did it four different ways from a financing standpoint, and you bought in three different markets. Really interesting story, and interesting to hear your thought process for how you mitigate the risk by getting connected with the right people, and then plugging into their teams and their systems and their connections, to then help you get started faster, but then also to help you have a credible team as you get going.

And the story about you traveling to the market, Kansas City in this example, where you asked what can you do to help those people out who connected you to these markets was great… You took pictures of the properties, and you also came back with a lead for them too, whether or not that transpired and happened to be a close later – who knows…? But you gave them a lead as a result of you being there, and that’s a tremendous value.

Thanks again for being on the show, talking about approach, what you’ve done… Looking forward to continuing to hear and read about what you’ve been up to, and we’ll talk to you soon.

If you’re a syndicator of any type, one issue that arises is how to allocate the equity based on what everyone is doing for the deal. If you found the deal and someone else did the underwriting, who gets what? That is just one example of a potential problem. Jeff has figured out a formula for how to make these decisions. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visitbestevercauses.com.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Jeff Greenberg. How are you doing, Jeff?

Jeff Greenberg: Hey, I’m doing fantastic, Joe.

Joe Fairless: I’m glad to hear it. Best Ever listeners, you know Jeff Greenberg because you’re a loyal Best Ever listener, and you were a loyal Best Ever listener way back to episode 47 (yeah, 47); Jeff was my 47th guest on this podcast. I titled it “Follow the well-worn path to success.” I also interviewed Jeff in episode 424, “How to deal with a falling-apart high stakes situation.” That was a fun story.

Today we’re going to be talking about how to allocate equity based on what your partners bring to a syndicated deal. As apartment syndicators, or as any syndicator really, there are different roles and responsibilities that need to take place, and if you have partners, then how do you determine what is valued over what? Finding a deal, doing the underwriting, doing the due diligence, getting the debt financing secured, signing on the loan – all that stuff.

Well, at my conference in Denver, Jeff approached me and he said “Joe, I’ve actually come up with a formula or a range for different responsibilities, and their weight as it relates to value.” So we’re gonna be talking about that… Jeff, I’m really excited; are you ready, my friend?

Jeff Greenberg: I am ready.

Joe Fairless: Awesome. A little bit about Jeff, really quick – he is the CEO of Synergetic Investment Group, has been investing in multifamily since 2007, has been involved in acquisitions of over 800 units, valued over 30 million dollars. Based on Los Angeles. Jeff, take it away. Tell us what was the inspiration for coming up with a structure.

Jeff Greenberg: Well, I have to admit for the most part it was desperation, but what it was originally is a group had approached me and wanted me to mentor them. This never started out with the thought of becoming a business, but I met with a group and we started doing training sessions, and as it moved along, we had people wanting to learn more and learning hands-on; I was telling them how to talk to brokers, how to get deals coming in. We continued that, and we started to get into some deals.

Once we did our first deal, we started thinking, “Well, how are people going to get compensated?” Well, the first time I said “Well, how much are you gonna be paying me for the mentoring?”, and since I hadn’t charged them for the mentoring, what they received was very limited as far as compensation… But then we went into a second deal and it started becoming more of a company.

We had to figure out how we were gonna fairly distribute this… This was great, because the group was doing a lot of the work of the company, and I felt they should be compensated… So we had to figure out some kind of system.

I wanted a system that emphasized those areas of greatest need, which as most of us know, is finding the deals, finding the equity and signing on the loan. Those I felt were the three highest priorities.

Then some of the minor ones were underwriting, doing research as far as market research, and research on the property… All that stuff was more for a minor role. So I put the emphasis on the major three. Those were the biggest pieces. Then we have the minor ones from there.

Now, we also set the company up where I have a deal lead, where one of my people will take on the role of the lead, and they’re pretty much the orchestrator. They will work with one of our underwriters. The underwriter needs something, they will go back to the broker, get information from the broker, and they go back and forth with the underwriter, or with someone doing research, and basically leading that particular deal.

So as a team lead, they’re also getting a certain percent. And those people doing the underwriting, those people doing the research – all are involved and they’re all getting a piece of whatever the sponsor’s cut is going to be.

I also have a team lead that basically he’s also the orchestrator of all the deal leads, and they go to him for a lot of whatever’s needed. For the most part, it doesn’t come to me until they feel it’s a deal and I’m the last reviewer that will review it and decide if we’re gonna put in an LOI.

So all of that frees me up to do what I’m doing most of the time, which is networking, and bringing in the money, and meeting people, and sometimes bringing in deals, but for the most part looking for the equity partners.

Joe Fairless: One thing I didn’t hear as far as a major category (or even in the minor category) was asset management… So where do you put that?

Jeff Greenberg: Okay, so all of this was leading up… We do put in an asset management fee in there, which originally on our properties was either myself or my team lead, but as we have some very capable people that I’m progressively bringing up… So now one of the ladies – I’ve put her into position on one of our properties as asset manager; I’ve been training her. We’ve got another lady that’s gonna be taking over an asset management on another deal…

When we’re going through the due diligence and closing process, it’s pretty much all hands on deck, but everybody is working on different pieces. My team lead also happens to be a mortgage broker. He’s pretty much handling looking for the loans and taking care of the debt end of it… So that takes a big piece off of there.

As far as going to the properties, walking the properties, a certain number of us will go and walk the properties and do most of that due diligence.

Joe Fairless: So we’ve got — according to you, the main categories are finding the deals, finding the equity and signing on the loan. Then you have minor categories, and you’ve got a deal lead person — a deal lead and a team lead. That’s how the team’s structured. So with the major categories that you said – finding the deal, finding the equity, singing on the loan – what equity is associated to those?

Jeff Greenberg: Those, I believe, are at 15% of our cut. So we divide whatever the sponsor cut is and I believe they’re somewhere around 15% each on those. The team lead gets a cut no matter what, and I get a cut no matter what in the beginning, but right now both of us are also getting pieces of the other ends of it, because we’re wearing many hats, so we’re also getting some of that as well.

Joe Fairless: Do you make a distinction between — we’ll go with finding the deals… Do you make a distinction between an off-market deal with no brokers, and a fully-marketed deal?

Jeff Greenberg: I make a distinction between somebody that just got a deal from an e-mail blast coming in, or a deal that was brought in through a relationship. That’s the main thing. If it’s off-market or not, if it’s something that we wouldn’t have seen on our own, but because they’ve established a relationship, that’s a higher priority, because that’s what I wanna encourage.

As I said, I wanna reward those things that are most valuable, and building relationships with brokers is one of the most valuable… Or getting off-market, non-broker deals, either way.

Joe Fairless: What would be the range…? So you’ve got the 15% for finding the deal; I imagine the lowest percent would be the e-mail blast, and the highest percent would be if they know an owner directly and there’s no broker fees involved… So what would be the range there?

Jeff Greenberg: Well, we haven’t really dealt with it exactly yet… This is a work in progress. [laughter] But we’ve done two deals under this system so far, so we’re kind of working on it. I can’t give you exact numbers, but like I said, the high end would be 15% of the deal, if it was something through a relationship. If it was something from a blast, it would be something lower than that…

Joe Fairless: Got it.

Jeff Greenberg: Those percentages would be distributed out somewhere else, different parts of the deal.

Joe Fairless: And then on signing on the loan, same thing – if it’s a recourse, maybe a distressed property, versus non-recourse, stabilized value-add deal, 15% is the high end, and then it’d go lower based on more stabilized non-recourse loan?

Jeff Greenberg: But the main thing is I wanna encourage members of my team – most of them are accredited investors themselves – to sign on the loan, as opposed to having to go outside of our group, which would probably cost us more as far as what we would have to give up. So I would rather give it to team members, that opportunity to sign on a loan.

Joe Fairless: Did anything change from the structure between deal one and two?

Jeff Greenberg: On deal one I took the entire acquisition fee, mainly because I was spending my time training them. On deal two, my company took half the acquisition fee and then we split the rest of it amongst the group, for all the hard work they’ve been doing.

Joe Fairless: Got it. And with the ownership for deal three and for the foreseeable future, if I have 15% ownership, and say the only thing I did was I found the deal through a relationship, so I’ve got 15% ownership – am I sharing 15% on all the profits from that? So 15% on the acquisition, 15% of cashflow, and any other fees?

Jeff Greenberg: It would be 15% of the sponsor’s cut, and yes, it would be 15% of the cashflow after the pref, if we’re doing a pref. It would be 15% of the sponsor’s cut on the equity end of it, it would be 7,5% on the acquisition fee, because the company is going to hold on to 50% just for future names.

Joe Fairless: Got it. Fair enough. And that’s for funding, for due diligence, or getting new deals, deposits, that sort of thing?

Jeff Greenberg: Yes, as well as company overhead.

Joe Fairless: Right. Yeah, that too. So on the minor stuff, the underwriting, the market research, the property research – how come the underwriting is in the minor category?

Jeff Greenberg: Well, because it’s not as mission-critical. I mean, yes, it needs to be done, but there’s a lot of us that can do that. It’s probably one of the less desirable ones, but we do have a lot of people that are good with spreadsheets and would rather do numbers than talk to people, but I just didn’t wanna put it up in the ranks of the priority… And so far, we haven’t had a problem as far as encouraging people to do the underwriting. That hasn’t been an issue. But typically, they’re doing other things as well.

Joe Fairless: And the asset management – can you clarify that? Is that in the minor category?

Jeff Greenberg: Well, it’s not that it’s a minor category; that one’s one we’re tossing around right now, because we have put in there a 1%, and unless it’s a large deal, it’s not a lot of money to be an asset manager. That’s pretty much why I’ve been doing it. In fact, for the most part, we haven’t taken asset management fees anyway.

We’ve got a couple of deals that are value-add deals, and initially there’s not money going to the investors, and I don’t like taking an asset management fee until the investors start getting money. And even on that, it’s not gonna be a lot of money, even at 1% or 2%. It’s a very important responsibility, so we might take some money from the property itself as the asset management fee, and then we may also put some other money into it from our side, from the sponsor’s side of it, just to make it more desirable.

For the most part, the people are learning how to be asset managers, and we’re overseeing it. I’m keeping my eye on everything, but a lot of this is people are learning how to do it.

Joe Fairless: And I know that you’ve done it on two deals, so it’s still in evolution, or a fluid process, but I’m wondering if an individual just isn’t working out, after you closed, but you’ve already assigned these ownership percentages, what recourse do you have, if any?

Jeff Greenberg: Well, I have complete control; there’s no signed contract.

Joe Fairless: Okay. So it’s a handshake thing, where “Hey, you get 15%”, “Okay.”

Jeff Greenberg: Yeah. And we’ve actually had someone that we did have to let go, and they do have some ownership in one of the properties, and they’ll still get that ownership. They may not get as much, but they’ll still get some ownership. We left on good terms, and they did the work that got the property. They’re not involved in running the property right now and the work that we’re doing now, so I feel okay with cutting back slightly on it… But the acquisition is the big thing; you and I know that that’s the first part, and then the next part is running the property, but still, that’s something that my time is freed up a lot more for, so I can do a lot more of that. Because they’re doing a lot more of the acquisition part of it, I can have my time available to oversee a lot more of that. I kind of put myself in that spot.

Joe Fairless: And with it being a handshake thing, have you had anyone say “Well, wait a second, Jeff… You’re a great guy, but I wish we’d have something on paper that showed that I own 15% for doing this work.”

Jeff Greenberg: Yeah, once we’ve closed, I have given out a document stating what their percent ownership is on that. So I’ve done that, yes.

Joe Fairless: Cool. What else, if anything, haven’t we talked about as it relates to this structure, that you think we should talk about?

Jeff Greenberg: Well, the important part is who you’re working with. As I said, we did have somebody that had to leave, and I don’t know that this is gonna work for everybody.

This team I have right now – we work as a team, and it’s a beautiful thing. We communicate a lot on Slack, so I have the opportunity to look at the conversations going on and I see people helping somebody out. Somebody has a family issue, “Can you help me out and cover for me while I’m doing this?” We’ve got a new person in that everybody was jumping in and training…

If you don’t have people that are willing to help other people out and help everybody grow and help the team grow, then it would be an issue, and we’ve had that situation, that we’re more into “Me, me, me”, and that just didn’t work for the team, and definitely could be a conflict.

I wanna back up on kind of the premise for this whole thing, and I talked to several other people that I know that have had teams of six people or so, all equals, kind of working on deals, and for the most part I was discouraged. I was very discouraged with the results that they were getting, because this person wasn’t carrying as much weight as somebody else, somebody else had more time, and they were upset that they should get more, and it’s just a can of worms… And that was the biggest hindrance, because I’ve got a couple women that their husbands are working, and they have all kinds of time.

I have other people that are working full-time jobs, and are doing this at night or in the morning, or whenever. So obviously, not everybody has the same amount of time. These are mature adults that have a life. They have kids. Well, most of their kids are grown up, but they have grandkids, so they don’t have the time.

So I can’t expect everybody to put in the same amount of time, and I had to think of a way that would be fair, and that’s why I did it on a task-based system, where based on what task they were performing, they would get compensated. So far, everybody seems to be happy with it.

Joe Fairless: This is great. As I mentioned at the beginning of our conversation, this is a question that I get fairly frequently, but I guarantee you comes up much more frequently internally amongst team members than what actually comes to the surface… So this will definitely help people think about how to weigh certain things.

Jeff, how can the Best Ever listeners get a hold of you?

Jeff Greenberg: Well, you can get a hold of me at jeff@synergeticig.com. I’m on Bigger Pockets all the time, you can go to my website, synergeticig.com, and you can get a hold of me. Any of those are fine.

Joe Fairless: Outstanding. Well, Jeff, thank you for being on the show. This was really interesting, to hear the different allocation of equity for certain tasks, finding deals, finding equity, signing on the loan, 15% for each, and then some other things like underwriting, market research, or any research in general, plus asset management have a lower percentage. Then you have a deal point person and a team lead point person, and then you’re also involved from a CEO standpoint.

Thanks for being on the show. I hope you have a Best Ever day, and we’ll talk to you soon.

Keith got his start in the real estate investing business with a 4 unit that he bought with his cousin. They had to borrow money from friends, family, and credit cards to make it work. Once that deal was under his belt, Keith recognized the potential that real estate investing offered for his business and life. Hear how he was able to scale from that first property to over $1 Billion in real estate owned and/or controlled.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visitbestevercauses.com.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Keith Wasserman. How are you doing, Keith?

Keith Wasserman: I’m doing great, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. Keith is the founder of Gelt, and they have acquired over one billion dollars in real estate holdings. They since inception have acquired over (another way to think about it) 7,100 units. That’s both commercial, industrial and residential properties.

Based in Los Angeles, California. With that being said, Keith, will you give the Best Ever listeners a little bit more about your background and your current focus?

Keith Wasserman: Yeah, sure. I started this company Gelt in December, 2008, and I graduated from college in ’07. I didn’t have too many resources, but I saw the market was in turmoil, the stock market crashed, the real estate prices were in the toilet, and I said “You know what, this is the best opportunity to get into the game.”

I’m young, I don’t have a family yet, and my cousin and I, we bought a small 4-unit building in Bakersfield, CA, which is in the central valley of California, for around $150,000. We got an FHA loan, so we only had to put 2,5% down. We maxed out, we got a cash advance on our credit card and we borrowed 5k from a friend. That’s what got us into the game. That was the hardest part, just starting.

Once we started, we started buying another one with one family friend, and then another one… We bought 14 of these little REO bank-owned fourplexes, we renovated them, leased them out, and just repeated the process until we realized there’s a real business model here.

We started syndicated larger deals. We started buying a 78-unit building a full year later, in Bakersfield, in 2009, and it just was a very exciting time. Very scary, because people were like “What are you doing in Bakersfield?!”, going out there, two-hour drive North of L.A. It’s a very good economy, based on oil and agriculture, but most people in L.A. don’t really know where it is even, or don’t really deal with that city, but it was really growing fast and it got hit hard by the housing bust… But we felt like it was gonna be a nice place for recovery, and it did recover very nicely.

Joe Fairless: In total, you’ve acquired over a billion in assets… How many units do you have currently under management?

Keith Wasserman: We currently own and manage — I should take away “manage”, because we actually are outsourcing all of our property management… But we own over 5,000 apartment units and around 1,000 mobile home park sites currently. We’ve acquired now over 8,000, but we sold a couple thousand units over the last few years… But our goal is to really build a portfolio now and reach that 10,000-unit mark of current asset ownership, and really just expand from there.

We really started selling some buildings to create a track record, and it really did wonders, because we made a lot of money for our investors… We did well for ourselves in the process, but they then continued to give that money back to us for new deals, and told their friends and family and it really helped catapult us.

Joe Fairless: Why 10,000 units? What happens then?

Keith Wasserman: It’s just a nice, round number, big number, something to look forward to. We always kept pushing the goal post back further and further. Our first goal was, I’d say, 10 units, and we had our first fourplex. Then later on it was 50 units, then 100 units, and 1,000 units… It’s just a nice goal for where we’re at right now in our company’s formation and lifecycle.

To be honest, I always like feeling that we’re very new and we’re treated like a startup, and keep being very entrepreneurial. We have a pretty small, lean and mean operation; we have 17 people here in the office, we outsource all of our property management to third parties that we’re very heavily involved with, but it allows us to not have to be in the people business of hiring/firing/training. We constantly pay a third-party management fee of between 2% to 3% of gross revenue for the property management, and it really allows us to hone in and make money on the buy, which I’ve learned from early on in my career.

Joe Fairless: Prior to starting this, you were a college student – is that correct?

Keith Wasserman: Yeah, I was a college student. I started the University of Southern California in 2003, and I went until 2007… But all throughout my four years of college I had a different business. We were one of the largest sellers of general merchandise on eBay. I sold around 200,000 items, and I was going from my dorm room, to — I had a warehouse in the San Fernando Valley here in L.A. I was going back and forth, and we had around 13 employees for that business.

I started that in ’01 or ’02, and I outgrew my parents’ house. I started very small in my house, in the garage, and just outgrew it. My parents sort of kicked me out, made me get a warehouse, and it was a good problem to have… So I learned from a young age how to deal with employees, customers, lenders, and just growing a business.

Joe Fairless: What specifically from learning about how to deal with employees, customers, lenders do you apply to your business now?

Keith Wasserman: A lot of the same principles apply. One of my dad’s clients — my dad’s an attorney, and he had a client in the apparel business. He taught me not to be scared of really negotiating, and you really make money on the buy… And one of the first things I did – in high school, I was 17 years old, I think I was a junior… I went downtown L.A. and I bought 100 leather jackets for only $10 a piece. They were irregulars, meaning they had a little blemish on them… And the MSRP on these things (the suggested retail price) was over $300. They were Perry Ellis leather jackets. They were still brand new, intact, but they had little blemishes on them.

So I bought them very cheap, I wasn’t afraid to ask a very low price, and I ended up selling them for $80-$100/piece. It was a huge profit margin. I went selling them to students, to parents, to teachers, and to janitors, and to whoever I could sell a leather jacket to. My whole car smelled of leather jackets, but for a young guy, I made 8k-10k – it was a great feeling. I got some spending money, and really to be fearless, and really don’t worry about offending anyone; this is what I offered, and I was able to purchase them for that kind of price. You never know.

Just like in real estate – you’ve gotta make money on the buy. When you find a good opportunity, even if it’s paying market price, you still have to have a vision and gameplan for that asset. There’s no screaming deals, like there were back when I started, but at the same time they’re still out there; you’ve just gotta be more picky and choosy.

Joe Fairless: The deals still being out there, you’ve gotta be more picky and choosy – will you elaborate on that?

Keith Wasserman: Yeah, so when people zig, we zag. I’d say — we started buying in new markets, for example; we bought a great deal in Albuquerque, New Mexico. Albuquerque is historically a market that a lot of the big money has shied away from, they red line it just because it doesn’t as sexy of a story or as much growth. However, the property we bought was in the best part of Albuquerque, the Northeast Heights area – best school district… The property was around 100% occupied, meaning the rents were too low, and the asset was in our ’80s, kind of vintage, older asset that we usually buy. And larger, it was over 400 units.

So we acquired that, and we’re doing very well with it. There’s less competition compared to other markets that we’ve been in historically, like Southern California and Denver. We’re still buying in those markets, but we’re making a lot of offers and we’re getting beat up all the time. So we’re just staying with our guns, sticking to our prices.

That’s why we started buying a lot of mobile home parks as well, because apartments have been very difficult to find good opportunities, and the mobile home park is very fragmented. There’s a ton of mom-and-pop, original developers and the second generation in the business, not a lot of larger institutional kind of players, and we feel like there’s a good opportunity to acquire a lot of these parks, bring some more efficiencies and professional management to them and run them better… So we’ve started buying those as well.

We’ve even expanded to some development sites locally here in L.A. We’re buying land for ground-up development as well locally. So we are very opportunistic, but like I said, when people zig, we try to zag. We have a long-term horizon, which is very different from a lot of our peers that are more in the short-term 3-5-year fix and flip. We have sold some assets in that period of time, however we really aren’t trying to make a quick buck; we wanna really hold for the long-term, and real estate’s best friends are time and inflation, which I’ve learned from one of my very wealthy mentors who just passed a few years ago, named Jona Goldrich.

You can look him up, he was in the business for many decades. He was one of the pioneers of the early condo here in California. Time and inflation are really real estate’s best friends, so if you have that, you have a long-term horizon, you can withstand the market pullbacks, then you’ll be golden.

Joe Fairless: So for the Albuquerque property, for example, what’s the projected hold period?

Keith Wasserman: We bought it with a 12-year fixed rate loan. Most of them are Fannie and Freddie finance with 10-12 year fixed rate, because we’re very conservative. We don’t wanna take any interest rate risk. The rate was in the (I think) high 3% range, and we bought it over a 6,25 cap rate, so the cashflow was tremendous day one, with upside as well.

So we’ve put in our projections that we’re gonna hold it for that 12 years, however there’s a chance that we can hold it longer, and a chance that we can hold it a less period of time. We’re always [unintelligible [00:09:50].10] for our investors, and if someone comes to us with an offer way above market, we’ll definitely consider it, if we can find a suitable 1031 exchange opportunity to roll those dollars over. But for the most part, our gameplan is to hold it for that longer-term period and just refinance it when the loan becomes due and just continue to hold it if the area keeps improving and the asset is being well taken care of.

I always say, why get rid of the golden goose if it’s laying the golden eggs? We are long-term holders, and what does that mean? I’d say just generationally, if possible.

Joe Fairless: And with, say, the 12-year fixed rate loan, and your project is 12 years, and it could be more, it could be less… What are the projected returns to investors in that type of deal?

Keith Wasserman: We’ve pushed that one out at a 7% preferred rate of return to the investors, meaning the first 7% of cashflow annually goes to the investors; that’s paid quarterly. Anything above 7% we split 50/50. Let’s say the first year the property is projected to provide around 9% cashflow – the investors would get the first 7%, and the next 2% will be split 1% and 1%. They’ll get 8% on their money and we’ll get 1%.

If there’s an eventual sale, the investor gets back all of their money in full that they’ve put in, and then there’s a 70/30 split. 70% to the investor, and 30% to the Gelt team, and we call that [unintelligible [00:11:05].16] The other fees involved – there’s a 2% asset management fee; we charge 2% of gross revenues as an asset management fee.

We have weekly conference calls with the property management company, we oversee the entire business plan, we oversee all the major capital expenditures on the property… We’re very involved.

Then the last fee is the acquisition fee for putting the whole deal together, and that’s typically 1%-2% of the purchase price. It depends on the size of the deal.

So our investors are just very happy, because they’re passive, they can go on with their lives, working, or if they’re retired… We have people from all walks of life; we have around 600 high and ultra high net worth investors. As long as someone’s accredited, we’re able to work with them.

We’re just a nice alternative place for people to park money. Our minimum check size for any deal is $100,000, but if someone wants to start with $50,000, that’s suitable; you’ll also feel more comfortable with us.

It’s been a great way to grow, this syndication model.

Joe Fairless: So for that 12-year projected hold to your investors, what is the projected internal rate of return on a deal like that?

Keith Wasserman: A deal like that – I think the IRR at a deal-level was around 14%, like a mid-teen kind of IRR. We’ve always underpromised and overperformed. We’ve never missed any of our IRR hurdles. It is getting tighter and tighter, and investors are just getting more realistic… We just show them, this is what the market is and those are the deals that we’re buying. The ones we’re not buying are like single-digit kind of IRRs… And for certain kinds of investors, that’s okay, like big insurance companies, etc.

We’re talking on a little more risk, because we are buying a little older assets and we’re in secondary markets, and we need to hit at least that mid-teen IRR. But to be honest, we’ve sold around 13 properties and the average IRR has been in the mid-twenties on the deals that we’ve sold, as high as 50, and the lowest one was like a 15. But that’s a product of buying in the recession, ’09, ’10, ’11… We have a lot of unrealized IRRs on deals that we have no plan to sell.

I’d say when we’re buying deals now, if we could make that kind of mid-teen IRR, 12% to 16% range – that’s our conservative estimate, but we’ve always been able to exceed that… But who knows what the cap rates — it’s crazy, I thought they’d rise a little bit with the interest rates rising; they really haven’t. Most of the money — a lot of it has been on the back-end, on the sale of the property, but we buy properties that have good, consistent cashflow, so in case there is some cap rate expansion, the investors are still making a healthy return on capital during the hold period from cashflow.

Joe Fairless: What markets are you in?

Keith Wasserman: Right now we have apartments in eight different states. Colorado and West, so we’re in all the Western states. We’re entering Texas now, so we’re moving a little bit further East. And then on the mobile home park front, the additional states are Alabama and Pennsylvania. We have three parks in Pennsylvania, two in Alabama, one in Bakersfield, California, one in Reno, Nevada, and we’ve just bought an RV park in the Bay Area, in Monterey. But the apartments — the biggest markets for us are Denver, Colorado (1,500 units), Salt Lake City, Utah is a great market for us; we have 1,000 units there. We have apartments in Reno, around 500 units, Portland, Seattle, Southern California… And I’m probably missing one in here.

We were in Phoenix, in a big way. We had 2,000 units in Phoenix, that we acquired from 2010 to 2013. We exited all of those and made some huge profits for the investor. The reason we sold was to create the track record and to take some chips off the table. But anything we sold has gone up tremendously more in value… So if you believe in something and it’s a great location, I always recommend holding it for the long-term.

Joe Fairless: Do you have the same third-party management partner across all of the apartments?

Keith Wasserman: We work with three or four management companies. They are the best in those regions. We’re entering Texas now, San Antonio, and the management company that we were working with didn’t really have a big presence there, so we hired a local management company called UAG; I think they have over 10k-15k units just in that market.

Then our go-to property management company has been AMC or FPI; they’ve managed the bulk of portfolio, just because we like working with them, we have a good relationship, plus they’re in a lot of these major markets. But if those guys aren’t in one of the markets, we will definitely interview two or three local management companies and try to form that kind of partnership with them.

Joe Fairless: I imagine your management companies that you work with for a lot of your units, when you ask them “Hey, are you in whatever city?” and they say “No, but we’d be happy to enter into that city and manage your portfolio…” – do they usually say that?

Keith Wasserman: It depends. It doesn’t make sense for them just to have one or two assets. If it’s a market where they have a few assets and they’re making a push to grow, they will try to get our business, but if they don’t have a presence — it just costs a lot for them to enter a new market, and they try to do it with some scale… So the companies we’re working with are pretty upfront and honest.

Joe Fairless: Let’s just go with this scenario where they say “We would like to get into that market”, and let’s say you’re buying a portfolio that’s large enough for them to get that scale… How do you determine if you should go with your management company that you have a relationship with, that you’ve worked with, but isn’t yet in that market, versus a new partner, but is in the market?

Keith Wasserman: That’s a tough decision. One is like the devil you know and one is the devil you don’t know, I guess. In the past, we usually have leaned on companies that have actual boots on the ground and they have economies of scale in those markets… I probably think we’d rather go with someone that we haven’t worked with maybe, that has a big presence.

We’re very thorough in talking to other owners like ourselves to get testimonials to see how it is working with these companies. What’s really cool is I’m a partner and a co-founder in a financial technology company called Domuso, and our customers are actually management companies and other self owner operators… So it’s cool, because we know a lot of different management companies, we know how they are working with them, and how they operate; we have good insights into that.

I don’t know how much the listeners know, but not only are we involved in the actual real estate, but the technology behind the real estate. We’ve created this whole company that’s a financial services business to service customers that are like Gelt, property management companies, owner operators, to handle all payments on the properties. We do certified online payments, credit card payments, cash payments… You can now go to any MoneyGram location and pay your rent there. Some really cool, innovative stuff we’re doing, all around the payment of rent. Flexible payments… We’re doing our own point of sale financing, where you could finance any payment due to the landlord… Really cool, innovative stuff. I’m involved with a lot of different things, but I pretty much spearhead real estate, and my cousin, who’s my co-founder, is now spearheading this new adventure, Domuso.

Joe Fairless: Just going back to selecting a management partner, just to bring it back there for a second… So what specific questions do you ask the management companies to determine which one you should go with? …either the one that you know, or the one that you don’t know.

Keith Wasserman: We always like to see the operating statements on some other properties that they manage in that area, to see how well they’re operating them. Usually, they have to get approvals from those owners. We do that.

It’s all about the people… Sometimes we’ve worked with a management company that we like, but the regional hasn’t been that strong in a certain region… And they have reputations, like “This one management company might be better in Denver and Salt Lake, but not as good in Albuquerque” or whatnot. It’s all about the people, and having the right boots on the ground.

We’ve seen it in our properties, in terms of performance. The on-site leasing staff and the manager is crucial to the operation. That’s the first impression that’s given when you walk into a leasing office. It’s all about the people. Even if the market is really strong, you’ve gotta have the right people that are doing the management, doing the leasing, taking care of maintenance requests in a timely fashion, and just really taking ownership of those properties.

We have different bonus structures that we provide the management companies. We have in the past worked with management companies where they’ve reduced their fee, but we gave them a back-end piece of our promote, and that really aligns our interests… They’ve put their best people on the deal.

Some of these apartment communities that are 400-500 units have 8-12 staff members between the leasing office and in the field. The maintenance techs, the maintenance supervisors etc. We really try to form a partnership, even though those aren’t’ our direct employees; we really try to form a strong partnership with them so they work hard for us… And we really empower them. We’re not very over-bearing and micromanaging. We really empower the management companies to do the best job possible, but we have checks and balances where we go in and we do unexpected site visits, we make sure all the unit turns are being done properly, the property is looking up to par… Just stuff like that.

It’s worked for us, and we’re continuing to utilize these third-party management companies.

Joe Fairless: When they have their fee reduced but they receive a back-end fee as part of your promote – is that a separate agreement, or are they in the original documents that are sent out (the PPM and the operating agreement)?

Keith Wasserman: Yes, usually a separate agreement. I think we show it in our underwriting, but it’s just a separate agreement between us and the management company. We’ve done that on multiple occasions, and by reducing their fee, that 1%, they actually made a lot more from the back-end than that extra 1%, and we like it because they really turned around the properties in a good amount of time and really went above and beyond to do a great job.

It was a really creative thing that we’ve done in the past, and we’re always looking to really form these strong partnerships with these management companies.

Joe Fairless: What’s a specific example of what that back-end promote fee would be for a management company?

Keith Wasserman: I don’t remember the exact percentage, but we calculated on a 3-5 year hold on one of the earlier deals how much money they’d be giving up by reducing the fee from let’s say 3% to 2%, or — I forget the exact number. So you calculate what the missed income would be, and then we underwrote the deal and then we said “If you hit these numbers, which we hope you could hit, this extra (I don’t really remember) 1%, 2%, 3% of the promote is gonna be worth let’s say double or triple what that 1% reduction would be.” So reducing their fee – they might be doing it at cost, but there’s gonna be a really big upside for them.

Business is tough, the margins are pretty tight. I incurred anywhere from 20% give or take as the margins on property management. It’s not glamorous, it’s very unrewarding, and we felt like we really wanna treat these management companies right, respectfully, give them these performance bonuses and treat them like gold. They’re our partners.

When we’re looking at analyzing a new deal to buy, we always run it by our management companies who are our eyes and ears. They have more mass in the local markets than we do, and we really lean on them heavily.

Joe Fairless: What is your best real estate investing advice ever?

Keith Wasserman: Man, the best real estate investment advice ever… I’d say, just like Warren Buffet’s advice – when people are fearful, be greedy, and when people are greedy, be fearful. ’09, ’10 – we started buying in Phoenix, when there was blood on the streets. 100k people left via de immigration bill that passed, and Phoenix is the fifth or sixth largest city in the United States, it’s not going anywhere. I knew the population would continue to grow, and the industries would start firing up again, and it really did. They diversified the economy there, it’s not just based on housing, and… I didn’t think it would turn around so quickly, but I’d say that’s the first one.

And then two is have a long-term horizon always on any investment, maybe in the stock market or real estate… I like real estate because you don’t see the daily fluctuations, as opposed to your stock market account, where you can see the stocks going up and down daily.

I read a report recently that Amazon, for example, had a drawdown of 90% from peak to trough during the early 2000s or something, but if you were to hold it this whole time, you’d be up thousands of percents, or something crazy like that. So I’d say just buy in a good area that is appreciating, and take good care of the asset. We have a saying, “Run it like a Honda.” We don’t over-improve the properties, but we take really good care of them for the long-term. They’re the affordable alternatives for people in these nice areas, to be able to live in these nice areas, but have that affordable housing. That’s been our gameplan.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Keith Wasserman: Best ever book I’ve read… I like Warren Buffet’s The Snowball book. I think that was the title of it. It talks about his career and life, and I really realized, Rome wasn’t built in a day. Every day, as long as you’re pushing the ball forward down the field and making progress, one day you’ll look back and be like “Wow, we really did this.” It’s been around ten years since we started this business, and it’s pretty amazing what we’ve accomplished, but I still feel like it’s day one and really looking to continue to grow.

So I’d say that book from Warren Buffet was a good one.

Joe Fairless: Best ever deal you’ve done?

Keith Wasserman: Best ever deal we did – we bought a 415-unit property in Phoenix, Arizona in 2010 for 16 million, sold it three years later for 27,5 million. However, the next person put 4-5 million into it and sold it for 45 million… So it just shows, never sell.

Joe Fairless: How much did you put into it?

Keith Wasserman: Only a million probably. We were under-capitalized. It took us six months just to raise the money. We had to close with lines of credit and we brought it from some wealthier family friends, and we raised over six months the equity. It was a 5,5 million dollar equity raise, and for the time, that was huge for us. Now we wouldn’t even look at a deal that’s that small. It’s crazy.

Joe Fairless: What’s a mistake you’ve made on a deal so far?

Keith Wasserman: Under-capitalizing, I’d say. Not coming in with enough equity. I always err on the more cautious side. Over-raise. Raise more money for reserves and for cap-ex. It’s hard, you can’t go back to investors ever (or you don’t want to; at least I don’t want to). So I’d say under-capitalizing for a deal.

Joe Fairless: Best ever way you like to give back?

Keith Wasserman: We’ve just started our own 501(c)(3), the Gelt Foundation. We’re providing rental assistance for tenants that are at risk to eviction due to financial crisis, so I’d say giving back in my own industry has been really rewarding.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Joe Fairless: Keith, I’m really grateful you were on the show… Incredibly impressive what you’ve done from 2008 to today, starting with that 4-unit, and now your company has acquired in total over 7,100 units… And then the management questions and the insight that you provided is gonna be really useful for the Best Ever listener who are looking to hire management companies and looking for some questions that they might not be asking already… For example, “Can I see operating statements of properties you manage in the area, so I can see how you manage them?” Obviously, there’s gonna need to be some approval taking place, but that’s a question that’s in bounds, whereas perhaps some listeners might have thought that was an out-of-bounds question.

Additionally, a way to show alignment of interests that I haven’t heard of, and I’m really grateful that you’ve mentioned this, is having your fee reduced and having the third-party management company participate in the back-end promote, and showing them “Here’s the missed income, but then assuming that you do what we are all projecting you will do, then you will get 2-3 times more on the back-end.” Really interesting stuff.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Welcome to our first debate! Theo is debating an Airbnb expert, Sue Hoyuela. Listen as they go back and forth in this fun debate. The takeaways from this episode are meant to help investors learn more about each strategy, rather than beat the opponent down. That being said, head over tobestevercommunity.comand tell us who you thought won the debate!If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today

TRANSCRIPTION

Joe Fairless: Best Ever listeners, I hope you enjoy this debate series. Theo is going up against Sue; they’re talking about long-term leases versus short-term leases, and not what strategy is superior, but which one is best for you. So enjoy this debate, and let us know your thoughts on who has the best one by going to bestevercommunity.com and sharing your thoughts.

Theo Hicks: Hello everyone, and welcome to the first ever Best Ever Debate. We’re streaming live from Facebook right now. I’ll be your host this time, Theo Hicks. Joe is gonna sit this one out. My opponent is going to be Sue Hoyuela of BnB Freedom Formula. Sue, thank you for being on. How are you doing today?

Sue Hoyuela: Great, Theo. Thanks for having me, it’s an honor to be here, and to be the first one to do a debate with you.

Theo Hicks: Fantastic. I wasn’t doing [unintelligible [00:01:52].05] because my outcome for this conversation is to not have a [unintelligible [00:01:59].13] back and forth on what’s the better strategy… My outcome is to help everyone listening learn the different strengths and challenges of these two different investment strategies, that you guys can determine which one fits best for your current situation… Because at the end of the day, as real estate investors, we know that there really isn’t the best strategy; the best strategy is kind of subjective and is based off of your experience, your time commitment, the amount of money you have, where you live, and things like that.

So what we’re gonna do is we’re gonna go through a list of five different factors, and kind of go back and forth and explain how those factors relate to each of our strategies.

Before we get into that, it’s important to have some context… Sue, do you mind giving a quick background on how you got into short-term rentals, as well as what short-term rentals actually are?

Sue Hoyuela: Sure. Let’s see… Back in 2011 I was deep in debt, looking for a way to make extra money, and somebody said the word “Airbnb.” In 2011, mostly people would respond “Air B and what?” So it was a way to make extra money by renting a room or a house to short-term guests, kind of like a hotel in a way. This was a website that allowed you to create a listing. Airbnb markets that to the world, so now travelers have another option for where to stay, and they can come across your listing and say “Sure, I’d love to stay with you.”

Back at that time, we had nothing to lose. We were just trying to find a way to make an extra $100 to put towards our debt and get out of debt faster… Within the first month we made an extra thousand dollars, and that was just by renting a shed in our backyard. We were like “Wow, what else will people rent?”

I’m an entrepreneur, I like ideas, and so I started to get very creative with space. I rented the laundry room in my house, the cupboard under the stairs we turned into the Harry Potter room, we rented by couch, we rented actual rooms, and after nine months I’d created enough income from this little side hustle to quit my full-time job.

Then at that point I started saying “What else can I do with this amazing tool called Airbnb?” So I started renting other people’s property, and time shares… I used four different business models, and that eventually allowed my husband to quit his job, too. We got completely out of debt, and we were making a six-figure income… And we just started saying “This is the best thing since sliced bread; this is the actual door to financial freedom. We have to tell everybody about this.” So I started teaching, and coaching, and created an online course to help people eliminate the learning curve that I had to go through to create a six-figure income with these short-term rentals… And they’re a wonderful alternative to long-term rentals.

I’m excited to be able to share the ins and outs and the pros and cons with you here today, and I hope that your audience will benefit from that.

Theo Hicks: Well, I’m sold. I’m converting all my long-term rentals to short-term rentals tomorrow. [laughter] I’m really excited to learn about your four short-term rental strategies, because I think even if you aren’t going to do short-term rentals, I think learning about these strategies can help you make your long-term rental business more effective, or to kind of do it in addition to your long-term rentals.

Quickly, in one sentence, define what short-term rentals are, just for the purposes of this conversation…

Sue Hoyuela: Okay, a short-term rental is anything less than 30 days. So if you’re going to rent out a room, a space or a house on Airbnb, it’s going to be less than a 30-day rental to someone who’s traveling, for any number of reasons… It’s a simple distinction, but actually a very powerful one, and we’ll get into that in a moment.

Theo Hicks: Okay. Really quickly – most of you guys know my background, but I bought my first long-term rental in (I think it was) 2013. I house-hacked a duplex that I bought after just learning about real estate the night before… I had a property under contract within two days, so I got after it… That kind of speaks to I guess you don’t really need a lot of experience… Or maybe you do, based off of how it turned out and some of the problems I went through. But after I bought that, I held that for a year, I sold it, and then a couple of years later, which was actually last August, I bought 12 units of three different fourplexes, at the exact same time, while having a full-time job; I managed those myself for 3-4 months, and then I moved to Tampa for my wife’s job, and ended up putting those under property management.

So I have an understanding of the house-hacking strategy, I’m actually for buying rentals and then managing them yourself, as well as my favorite, which is having someone else manage them for you. So that is my background, and for the purposes of this conversation, I’m going to define long-term rentals as an active strategy – that doesn’t necessarily mean you have to be the property manager, but it’s not a passive investment where all you do is just give money to someone else and they do all the finding and analyzing and managing of the deals for you… So it’s active in the sense that you have to buy it yourself and find the deal yourself.

I’m also defining it as me using my own money; I’m not raising capital for it, because that’s not fair to talk about that, because that’s completely different… And then I’m also just gonna keep it to residential properties, just because I wanna talk about more of someone who has little experience, or is just starting, or is looking to transition… So they’re not gonna be buying a 20-unit as their first long-term rental deal. And then to distinguish it from short-term rentals, I’m talking about 12-month non-furnished units.

The first factor, and I guess the most important factor, and the one that I already know that short-term rentals wins on is the returns. For my long-term rentals, when I’m looking at deals, I want a five-year average of 10%-15% cash-on-cash return. It’s usually buying 25% down, so I want a 10%-15% cash-on-cash return over a five-year period. What are the returns – I’m sure this is a very vague question, but what are the range of returns for short-term rentals?

Sue Hoyuela: Well, that’s one of the things that I discovered early on that just blew my mind. Short answer is double to triple what you’re used to making with long-term rentals. But the way I discovered that was when we started renting a room in our house, I was looking at like “What if I went to rent it on Craigslist?” and it was maybe $500/month to rent a room in someone’s house… And if you break it down, that’s $17/day. So when we put it up on Airbnb, it was $50/night, and that’s gonna be times 30 nights in a month, that’s $1,500/month; triple what you would have gotten from a regular long-term tenant.

When we applied the same strategy to a whole house rental, the same thing happened. We were renting it for $1,200/month, and when we put it up on Airbnb, we made $3,600/month. So that’s super powerful, and I’ve seen it across the board.

The funny thing is when I talk to landlords and I say “How much rent are you getting from your long-term tenants?” and they’re saying “Well, I could probably get more, but I’m afraid to raise my rents, because it’s so hard to find a good tenant… And if I raise it, they might leave and then I don’t know what I’m gonna get.”

So they wind up kind of shooting themselves in the foot almost by not raising the rents as much as they should to keep that income coming in the way it was the original intention, right? Invest in real estate and get that passive income coming from the rentals… But you have to continue to increase it, and a lot of landlords don’t. They could switch to the short-term model, and they’re actually gonna get a bigger boost in their rental income right off the bat.

So I call the difference between renting by the day, by the month to the long-term tenants, compared to renting by the night, to the short-term guests, the difference is night and day.

Theo Hicks: Nice. [laughter]

Sue Hoyuela: [unintelligible [00:10:03].29]

Theo Hicks: Something that I’ve discovered in my research about returns is consistency. People were saying for short-term rentals, since you’re doing it daily or weekly or monthly, the returns are not gonna be consistent month-over-month, whereas for long-term rentals – of course, there’s exceptions to this rule, but usually you’re gonna be collecting the same amount of rent each month… So could you speak on do the month-over-month rents fluctuate a ton? Is there some months where you’ll make no money and other months you’ll make times six times as much as you usually do, or is it consistently that three times number month-over-month?

Sue Hoyuela: Yeah, that’s very true… It speaks to risk tolerance, because the income does fluctuate, and it really depends on a lot of factors: where your property is, if it’s gonna have year-around traffic or if it’s just gonna be seasonal… So it’s gonna vary depending on where the property is and who your niche is, but there’s actually a really cool website that you can check out, if I can just throw it out there for folks…

Theo Hicks: Absolutely.

Sue Hoyuela: It’s AirDNA.co, and it’s got something called The Rentalizer. It’s really cool – you put in your address and it will show you exactly what type of occupancy rate to expect every month, based on seasonal demand and all that good stuff.

So that’s a very difficult question to answer, but I’ve found that for me – we’re in Los Angeles, and it fluctuates; summers are a busy time. We have huge events at times where our income just skyrockets, but it’s always out-performing the long-term.

For me, high turnover is a good thing, because I actually have five income maximization strategies that I incorporate into my short-term rentals, so that every time we have a turnover, I’m actually adding to my bottom line, and adding additional streams of income to my income with that. So it could be very powerful, but you have to have the tolerance for that; it’s not for everyone.

Theo Hicks: Absolutely. A couple things you hit on, I’ll definitely ask you more questions on before we move to other factors, but the last question I have, and I think I know the answer to this… One thing that attracts a lot of people to long-term rentals is the ability to accumulate equity, whether it be just natural appreciation, or renovating it and increasing the rents and increasing the property value that way… And then after a year or two pulling out equity and using that to rinse and repeat and buy some more properties. Is that a strategy that you can use in short-term rentals?

Sue Hoyuela: Absolutely. I know quite a few people that wanna do the buy and hold for a couple of years, because their end strategy is to actually flip it and get that equity out… But why not just rent it on a short-term basis in the meantime, because it actually gives you a lot more flexibility when it comes to exiting that property. If you’re on an annual lease, you’ve gotta wait 12 months for it to expire, but with Airbnb you can stop that calendar at any time you want, so you don’t miss out on opportunities like that.

Theo Hicks: Yeah, I figured… A quick follow-up question – when a bank is looking at a property and looking on whether to refinance or a home equity line of credits, do you show them what your occupancy and what your rents have been? I guess is the process the exact same as it would be for a rental, or are they like “Oh, well this is maybe inconsistent…”, they look at it differently and have a lower LTV, or (I guess) a higher LTV?

Sue Hoyuela: You know, that’s really cool, because I was doing Airbnb since 2011, and I wanted to refinance and see if a bank would accept that income, and they were like, “No, that’s ridiculous…” But now that Airbnb has been around 10 years, they are viable now and they’ve proven their business model, so now yes, banks are accepting your Airbnb income as proof that you’ve got steady income and that you can confidently refinance on right now.

Theo Hicks: That’s a huge recent development for short-term rentals.

Sue Hoyuela: Yeah, very exciting.

Theo Hicks: So that completes the return factor. The next one I wanted to talk about – I call it barrier to entry. I have it broken into subcategories; it means a lot of different things. The first one is about location. We actually had someone who’s watching ask a question… He asks:

“Can you Airbnb anywhere, or are there cities that will not allow it? If so, what do you do then for short-term rentals?”

I’m assuming he means maybe the location or the regulation against Airbnb… Do you wanna speak on that?

Sue Hoyuela: Absolutely. Yes, you have to comply with the local laws and rules, and if they require a permit, or whatever it is, you need to find out what that is and comply. It’s difficult though; there’s no blanket, no standard anywhere, so you do have to do your due diligence and so some research online.

I start with the city and the municipal code to start seeing if they have anything in place for short-term rentals. They use a lot of keywords. If you’re gonna do the research in your city, you can look under short-term rental, vacation rental, sublet… Some really archaic terms they’re using are room and board, boarding house, rooming house… Things like that. Yeah, they have all kinds of different terminologies, so it’s a little tricky to find out what the rules and laws are, but Airbnb does have a Help section for that, as well. For the bigger cities, you can already find the documentation in Airbnb’s Help section, and they link to all the things you need, so it’s really helpful.

Let’s say for example you’re in a city — oh, goodness, so many things came to mind… So I have what I call the Pyramid of Safety, of where I consider doing Airbnb. The top of the pyramid is the “Don’t do it” area, and that’s usually in HOAs, gated communities, condos with CC&R’s, because they have their own little governing boards that any moment they can change the rules, and if you do Airbnb and they decide to say it’s not permitted, you’re out of business. The risk is too high, and I’ve seen that happen to a lot of folks… So I don’t do it in anything that’s got regulations like that.

Apartment buildings are the next most dangerous place to do Airbnb, in the sense of getting shut down. They’re saying that it’s eliminating affordable housing. So do that with caution.

But if you get out into the suburbs, away from the hub, away from the main spot, that’s what’s powerful about Airbnb, too… Because you make more money out in the suburbs. First of all, it costs you less to own a property or rent something out away from the city center, and you still make fantastic returns on Airbnb… So that to me is the sweet spot – staying away from the main place that’s got all the attention on it.

There are some cities that have been completely — it’s just not allowed. I was speaking in Michigan, in Grand Rapids, and the people were like “No, they don’t allow it here in Grand Rapids.” Yeah, but the border, one block away is the next city over, they have no rules or regulations whatsoever. Do whatever you want.

So if you’ve got that flexibility – that’s what I usually say, is just look across the border for the next city over, and everything could be just fine. But if you don’t have that flexibility, you probably shouldn’t do it on that particular property… But there are ways to still get in on the Airbnb game if you still wanna play. I’ll tell you more about that later.

Theo Hicks: Perfect. You’ve basically hit on what I was gonna ask you next, so I’ll explain that, and if you have anything else that you wanna further elaborate on… Obviously, there’s the regulations in these locations, but there’s also the demand on the location, and I know for long-term rentals you can do a rental in the city, you can do it in the suburbs, I guess you could definitely rent out a farmhouse and do it that way… I’m thinking you’ve kind of already hit on this, and it was actually surprising because I figured that it would be ideal in the big cities, but you’re saying that the suburbs are actually better.

The one person that I knew personally that did Airbnb, they actually had theirs next to a hospital, so what they were actually going to do – or they considered doing – was obviously the hospitals have their hospital beds… They were gonna turn their house into like a makeshift hospital, so they could put excess patients in there… I can’t remember exactly what they said, but the amount of money that they would have made by doing that was something insane; it was crazy, because obviously there’s regulations to how many beds you can put per room, and things like that… But they were by a hospital, so… Can you walk us through what are the types of things that you wanna look for in the specific market, that will let you know that there’s gonna be a strong demand for these short-term rentals?

Sue Hoyuela: Oh wow, okay.

Theo Hicks: I’m sure there’s a million things, so…

Sue Hoyuela: Yeah, that’s one of the things that’s in my course, because that’s a real exercise to try and identify who your ideal guest is… But what I’ve learned is no matter where your property is, there is a niche to serve. Somebody’s gonna wanna stay there on a short-term basis…

Theo Hicks: Okay.

Sue Hoyuela: Yeah, and you always discover things kind of like a surprise. We started getting a lot of poker players coming to our house, professional poker players… I’m like, “Nah, you can’t make money as a professional. That’s an oxymoron, come on.” No, really, they actually are professional, and we didn’t realize that we were three miles away from the Commerce Casino, which is the poker capital of the world. Who knew…? So three miles away – poker players love us. They can get there for less than $5 in an Uber, and it’s perfect for them.

So as I’ve traveled, this is what I found – no matter where you go, there is a niche. My brother-in-law, he actually comes to me and goes, “Guess what, Sue?” He does Airbnb on his own house, in his rooms; we’ve kind of shared it with our whole family and now they’re all in Airbnb… And he says “I bought a property out in San Bernadino.” I said “That’s great! What did you buy?” “Two acres.” I go “Yeah? Well, what kind of house is on it?” He’s like “Just dirt. Just two acres.” And I say “Great!” He’s like, “Yeah, it’s already up on Airbnb, I’m already making money.” I’m like, “Wait… Okay, this is two acres of dirt in Lucerne Valley, where you don’t have water, electricity, there’s a road about a mile away… You get cell signal, and that’s it.”

He’s got a niche out there, because people love to go ride their ATV’s, he’s got film crews that are renting it… All kinds of people wanna rent that property and he’s making a killing on a piece of dirt. He didn’t even have to develop it. I was like, “Dude…” [laughs]

Theo Hicks: So this sounds like it depends on how creative you wanna get, and if you’re a super-creative person – someone like you, definitely… I mean, you started off renting out a shed in your backyard… Then this sounds like an amazing strategy.

For someone like me, who’s a spreadsheet guy… I’m very good with numbers, but whenever my wife asks me to pick out a certain color of couch, I’m just like “I don’t know, they look the exact same to me.” So for me, I really like long-term rentals just because it is so simple and basic…

I know some people get a kick out of that creative aspect of it, but I like just the basic — you find a property in an up-and-coming area, you stick some renters in there, you don’t have to do anything fancy… I personally stick around he C or B-class properties in markets that are ride on the outskirts of A markets, that are renting for just these insane monthly rents, like $1,200 for a one-bedroom per month… Eventually, those people are going to want to start moving somewhere more affordable. That’s what I’m seeing in my rentals right now. Location-wise, I like to pick places that are right next to really nice areas.

Since we’re talking about barrier to entry, and kind of transitioning to expertise and experience – that does take some experience, because every neighborhood is different, every street is different in the neighborhood… So if someone tells you to invest in Cincinnati, for example, there’s A markets in Cincinnati where houses are over a million dollars, or where you can get, as I said, rents for $2,000 for a 2-bedroom unit, but then literally a mile over there’s fourplexes that rent for $450. It does take a lot of — not necessarily time-consuming activity to understand your market, but you’re gonna have that for everyone.

Something else about the barrier to entry, as I just said, was experience. For me – maybe I’m an anomaly, but the second I learned about long-term rentals, I just went and bought one the next day. The reason I was able to do that was because I was able to do the house-hacking situation, so I was able to put down 3.5%… In hindsight, I wish I would have done the 203K type of loan, because I did renovations to it, I just didn’t know anything, so I paid out of pocket for the renovations… But I was able to get in there and get a crazy return just because your down payment is so low.

So in regards to barrier to entry, from my perspective, I think long-term rentals are great because of the opportunity to do the house-hacking strategy, which is you buy with owner-occupied loan, you live in one unit, and then you rent out the other ones.

It has to be a residential property, of course, but that way you could essentially live for free, so it’s a great strategy for people that are just out of college, that have maybe 10k saved up.

I think my down payment was like $5,500, and I ended up renting the top one for $1,400 and my mortgage was — I can’t remember exactly what my mortgage was, but I was actually making money, and I was like “This is the craziest thing ever. I just can’t believe this is real.” And of course, it’s different for me, because I didn’t know anything about real estate… I thought that you would have some sort of certification to invest in real estate; I was a complete newb.

Also, there’s one other point – I wanted to ask you about the team… I’m not necessarily sure if you are doing all the management yourself, but if you aren’t, or for people that have a full-time job and they don’t have the time to manage it themselves, how do they go about doing that? Is that a challenge that you or any of your clients have?

Sue Hoyuela: Well, that’s interesting that you should say that, because in the beginning I was all about creating systems and streamlining… So I implemented all these systems in my own house, so that I didn’t have to do as much. I trained cleaners, and put in systems for inventory supply… Then at one point I outsourced the communication to a co-host. That pretty much took everything off my plate. It was that simple.

Then, actually, I did have people that had properties asking me to help them, so I started a guest management services business, so that I could do all those things for busy landlords, and help them enjoy the income without the hassles. So if you’re scheduling cleaners and restocking supplies and that’s a hassle, then I was taking care of that for them.

Since then, I’ve been teaching people now how to start guest management services as well, because the need and the demand is so huge across the country and the world that there is enough to go around.

I have to say though, I love your story about the house-hacking. I wasn’t sure what that term meant, but I love that you shared it, because it’s crazy — my daughter right now is buying the house she’s living in, because it happens to be a duplex… It’s like a pocket listing deal, right? The tenants in the back moved out, the landlord came to her and said “I’m thinking about selling it. Do you wanna buy it?” She said, “Sure”, and she’s already got a storage unit full of furniture, so the minute she closes escrow, she’s throwing all that furniture there in the back house and turning it into an Airbnb… So it’s kind of your strategy, but now it’s on steroids; you’ve got the extra income from the short-term rentals to just amp it up.

She’s been doing Airbnb too, in her own house, and now that she’s got this opportunity, she already understands the power of Airbnb, so it’s not even a question of long-term or short-term… She’s going short-term all the way.

Theo Hicks: I think I found a title of a book for you… Instead of house-hack, it’s the Airbnb-hack. I think that’s gonna be the next big thing. We were house-hacking before house-hacking was a thing… I’m not sure when Brandon Turner coined that term, or even if he’s the one that coined that term, but the guys that taught me about real estate – they both house-hacked five years before I was house-hacking, so back in the mid-2000’s; it wasn’t called house-hacking… I didn’t even know how he discovered it. I actually know [unintelligible [00:25:46].07] but I’m glad that he told me about it.

Sue Hoyuela: Good strategy.

Theo Hicks: So we’re kind of already touching on it, so we’ll transition into the next factor, which is time commitment, because obviously, if you wanna make money, time is also a very valuable resource… And of course, for any strategy, you can automate the entire process and really have no time in there, but for — I guess I’ll say my side first, because I kind of did all three entry-level models… So for house-hacking – again, this is just me personally, based off of my personality… That one was the most stressful for me. Obviously, when I’m stressed out, that affects my time, because I’m not productive at all… But it was just stressful. That could mean doing parts and not knowing what I was doing before I entered, but whatever I just thought of the house – I thought it was gonna fall to the ground, catch on fire… [laughs] Whenever my phone rang, I thought it was a tenant telling me something was wrong… So that was a mess, which is why I took a two-year break.

Then after those two years, when I bought these 12 units, I did the management of all those myself. I probably spent on average maybe around 10 hours a week doing that full-time management. Once I first took it over and got all of those large duties out of the way, which is sending out all the new letters and letting them know who you are, fixing any ongoing deferred maintenance, which people that are listening to this know all about that – my boiler issue… I’m probably known as “the boiler guy” now… But once I was done with that, most of my time was spent doing landscaping. I’d go in and rake leaves and mow the lawn… Obviously, that’s stuff that’s very easily automated, and it was only 12 units, but the time commitment on that wasn’t very hard.

Now that I have an actual property management company, it’s even less, because whenever something happens, instead of having the tenant call me, I have to go there to look at it and see what’s going on and then find the proper person to solve the problem for them, now the property management company will either do all of that upfront… If it’s a small maintenance issue, they do all of it and I won’t even know about it until the end of the month. Or if it’s larger, they’ll just say “Hey Theo, here’s what’s going on. Here’s what I’ve already done, here’s the quotes. We can do this, this or this. Option a, b or c. What do you wanna do?” and then I just look at my phone, I go “Option a” and then that’s it.

So that’s how it is from my specific situation. Again, I know that it’s different — if you find the wrong property management company, that could be a problem; if you have a bad maintenance person, that could be an issue… But those are kind of just the two different types of strategies for long-term rentals that I did, and the time commitment associated with each.

My question for you – because this is what I would imagine, is that it would take a lot of time to manage a short-term rental because of all the extra variables that are involved… But I’m sure you have a perfect solution for that, so let’s hear it.

Sue Hoyuela: Of course. I have to admit, when you own property, you still have those same issues… You’re a landlord, you still have to make sure the deferred maintenance is kept up, and things can go wrong and you have to fix them… The benefits though, what I’ve heard from my landlords is that when I’ve been managing the properties for them as a guest management services manager – so it’s similar to a property manager, but it eliminates a lot of the headaches for landlords, I’m gonna say in three major areas.

Theo Hicks: Okay.

Sue Hoyuela: First of all, when you’re a landlord and you’re looking for a new tenant, the time it takes — because you wanna make sure that you get a good tenant, so it’s gonna be a long-term thing, and you wanna go through the process of screening, and running their credit, and their background check, and their bank statements… Then it’s like courting them, and you have to meet them, and then you interview them and you show them the property… That time process – I don’t even know how many weeks that takes. If you have a property management company, they’re gonna do that for you, but that process of finding a good tenant takes a long time.

When it comes to short-term rentals, everything boils down to three questions, and in my system it’s actually three questions that when they answer my question, I can give them an answer whether they’re going to stay or not in less than a minute. So we’ve just reduced the whole screening process down to like 30 seconds.

Theo Hicks: And what are the three questions you ask?

Sue Hoyuela: I ask them “Where are you coming from? Who are you traveling with?” and “What will you be doing while you’re in town?” You have no idea… They seem rather innocuous, but those are some extremely loaded questions, and it’s very important that you answer correctly, or that’s it! You’re not staying.

It’s interesting, because I worked backwards… From all of my horrible experiences with bad guests, I started saying “Well, if I had done this, I wouldn’t have had that problem.” And as I started to see patterns, I started to be able to eliminate the things that were going to cause problems, and it just boils down to those three questions.

So when it comes to screening, now we don’t have to pay a management company to run credit, and show the property, and put signs and post signs – none of that; Airbnb handles it all. I just have to screen, three questions, boom. That’s done.

Theo Hicks: I have a quick follow-up question to that before we move on to the other two… What would be an example of something that would eliminate someone from contention?

Sue Hoyuela: Okay, so when I’m asking the question “Who will you be traveling with?”, it’s very carefully worded, because when the answer comes back, “Oh, I’m not traveling with anybody; I’m booking on behalf of my mom and my sister, who are gonna be visiting you while they’re in town, but I don’t have a room for them to stay in.” That falls under the category of a third-party booking, and that’s a rather extensive explanation of why you don’t wanna do that… But immediately, in the wording, when they answer me, if they are booking for someone else, that’s a decline. I’ve got horror stories to explain why, but we won’t go into all of that right now… It just suffices to learn from experience. That’s one way to weed out a lot of problems.

Theo Hicks: Okay. What was number two? Not the question, but the second thing to reduce the time commitment.

Sue Hoyuela: Right, so the repairs and all that good stuff, and you said if you have a good management company. One of my landlords, he had a property in Whittier, a 5-bedroom 3-bath, and it was super high-end. He was getting $4,500/month for it, renting it to like the dean of Whittier College, or something like that… And the tenant moved out, and he had his management company find him a new tenant. So the management company did, and it was a disaster. It was kids, and they started bringing their friends over, they turned it into some sort of a den of iniquity, I don’t know… But it went downhill fast.

They had to evict everybody, and when they got in there after the eviction process, he discovered this massive hole in the ceiling that was caused by some sort of a leak. He said, “Hey, management company, you were supposed to be checking on this at least every six months. How did that get there?”, because it had been like two years… So things like that don’t happen when you’re doing short-term rentals, because you have such high turnover; every little thing is taken care of, done, and doesn’t blow up into a huge, huge problem… So you save a lot of money on that end.

And then the other thing that is interesting – I don’t know if it’s true in other states, but in California, when you rent to somebody, or lease, the tenants have more rights to the property than you do, and it’s kind of annoying. If you wanna go in and check your property you’ve gotta make an appointment, and if tenants don’t wanna let you in, that’s it; you can’t go in. And it’s weird, because it’s your property. I never understood that… “Wait a minute, who’s making the mortgage payments here…?”, but that’s the law. So when it comes to Airbnb, you can come and go in your own property whenever you want.

One of my landlords, he’s calling me saying “Can you open up a block this weekend? Because my wife wants to have a book party with her girlfriends.” I said, “Sure, it’s your property. You can do whatever you want with it.” It’s a huge benefit for landlords to have that control over their own property; it seems like such a small thing, but wow… [laughs]

Theo Hicks: Yeah, control is definitely big… And as you said, in California – I’m sure it’s statewide – it’s a tenant-friendly state versus a landlord-friendly state. I did a quick Google search, for people listening… I’ve looked into it before, and I can’t remember off the top of my head which states are the best for the landlord… But yeah, it’s things like how much time do you need to give them before you can go onto the property? Can you show up, or do you need to give a 24 hours notice? What is the eviction process? The security deposit return process… Those all vary.

Maybe that will convince some people to invest in an out of state market, as opposed to their own market… But again, as most things we’re talking about, it all depends.

So I guess the last two categories won’t take too long to talk about. One of them was – I kind of already mentioned this – the extra-variables involved with short-term rentals over long-term rentals. Things like furnishing the units… It’s something that I didn’t think about until I was researching, but a review is very important — I guess reviews are important for short-term rentals, as opposed to someone like me, who’s got four units and doesn’t have a company… Again, I guess it would be reviews on Airbnb, not like a Google review, so essentially you’re kind of under a microscope; you have to be on top of your game a little bit, whereas for me – I’m not saying I’m slacking off or anything, but it’s just a whole different thing.

Other examples are — and I guess you could get creative with this, but the amenities, what all you’re gonna offer. Are you just gonna do just the standard toiletries? Are you gonna put some goodies in the fridge for them, or leave them a bottle of wine to make them really enjoy their stay?

And then [unintelligible [00:35:15].09] but also, if you are going to have a property management company, I know for long-term rentals you’re looking around 10% of the collected income for a single-family, and then as you get to four units you’re looking at maybe 8%… I don’t know what a short-term rental rate would be, but I do remember at the Best Ever Conference someone who does short-term corporate housing was there and said that it was like 25% property management fee.

Obviously, I understand that it’s all relative, based on the income you’re bringing in. If you’re bringing in five times as much income, but you’re only paying three times more in expenses, then it’s fine, but do you wanna kind of speak on anything I just said there?

Sue Hoyuela: [laughs]

Theo Hicks: I know it was a lot.

Sue Hoyuela: I’m overwhelmed, yeah. I actually, wanted to go back to the previous conversation and say that evictions are another issue if your state is not landlord-friendly. If you do short-term rentals, under 30 days – usually, 30 days is the limit that if you cross over, now you’re in long-term rental territory and you have to evict clients if they don’t comply. But if you’re under 30 days, now it’s just a matter of trespassing, and it’s so much easier to deal with. None of the headaches. That’s huge. Thank you. Okay, got that off my chest.

Now, onward to the other good stuff that you were talking about… So when it comes to reviews – you know what, that’s so incredible, because before Airbnb, we hosted international students in our house, and all of our family and friends would say “You’re crazy. How do you let strangers stay in your house?” But reviews are what changed the game, because now there’s a certain amount of accountability, and it keeps everybody on their best behavior.

So because that’s built into the system, if you get bad reviews, you’re not part of the community anymore. So it’s actually what has created that trust that allows people to be crazy and stay in stranger’s houses… “What are you doing?”, right?

I’d say the same thing about Uber. When you were a kid, didn’t your parents say “Don’t get in a car with a stranger”? What are we doing now? We’re hopping in cars with strangers like nothing. Why? What changed? Reviews.

So that accountability and that being able to see that other people had a good experience before you, so it’s probably okay – it gives you the confidence to go ahead and enjoy the use of that.

So yeah, reviews are huge… And it’s funny, because when my daughter was looking for an apartment, she had a website that she checked, and there were apartment buildings with reviews for the long-term tenants, so I do know that you are getting reviewed on Yelp, or something…

Theo Hicks: Yeah, I’m pretty sure it’s really for larger ones… If you’re looking at a fourplex — I mean, maybe you could put whatever your LLC or rental company is on there; if you have like a website, a portal for all of your rentals, and tenants can come there and see your rentals on the website, then once you google that website, it’ll get that little thing on the side on Google, where you can do Google reviews… But I think it’s based off of having a website. If you have a website for your company, then you’re most likely gonna have the reviews.

And again, when you are doing anything in your life, whether you’re trying to find a restaurant, or a place to live, or a place to go on vacation, everyone googles “Best restaurants in Tampa FL”, and they’ll just sort based off of the number of stars and the number of reviews. It’s kind of at the point right now where reviews are, as you said, a game-changer… Now it’s so important to have solid reviews.

You need to have some sort of strategy… Or a couple of other things that I was talking about is there are certain amenities that you have, certain techniques, or anything that you do to make sure that you’re always getting that perfect five-star review, or ten-star… I’m not sure what the ratings are.

Sue Hoyuela: Yeah, exactly. It’s the way we live today, everything’s being reviews. It’s just a part of our culture now. So yeah, it’s actually pretty cool, and Airbnb – they give you the playbook, and they say “If you wanna be a super host and maintain that star rating, this is what you’ve gotta do.” So you’re like, “Great, that’s it. All I’ve gotta do is that.”

It revolves around six different areas for a host. I don’t think I can name them all off the top of my head, but the most important ones are accuracy in your listing – so whatever you’re promising, you’d better deliver. That’s common sense; setting expectations, basically, with the guest.

Cleanliness. Cleanliness is so important, because it’s the first impression. A guest coming to the bedroom, and like, dramatically tearing down the sheets off the bed and going “Ah-hah! Oh, it’s clean…” [laughter]

Theo Hicks: Did they expect like a rat under there, or something?

Sue Hoyuela: I know, right? I’m like, “Okay…” [laughs] So they really want that cleanliness, and you’re like “Okay, good.” There’s a lot of ways to ensure cleanliness. I have something called “The quick changeover cleaning system” that I’ve developed, so that we get consistent results every time, because it is critical to keeping your super host status and getting five-star reviews.

Communication is the other one. That can be the biggest deal breaker and make it so hard for guests, especially when they’re coming from other countries or they speak other languages… But Airbnb gives you all the tools, so that you can over-communicate. You can use pictures, so that it’s very clear and it makes everything so smooth. There’s a lot of different things… Location though is the one that has just driven me nuts, and I think other hosts too, because that’s one of the things you get reviewed on, and we’re like “What can we do about the location?” It’s like, “I can’t move the house. I wish I could, but…”

Theo Hicks: Yeah… I’m sure they do that just so people that are selecting where to live, they’re selecting where to go, and they want some amazing view or something, and they’ll look at that and they’ll be like — that’s like their main deciding factor… But there’s nothing you can do about that.

Sue Hoyuela: Right, and we’re aware that we’re not at the beach, with a view of the ocean… Okay, we’re 26 miles away, so our price reflects that. We’re not $300/night, we’re $49/night, so we make up for it, work with me here.

Theo Hicks: The last category I was gonna talk about was competition, but you’ve hit on that, because again, it’s obvious for long-term rentals – there’s plenty of actual properties that you could buy; I’m not saying that they’re being sold or the owners are willing to sell, but there’s gonna be thousands and thousands of single-families, duplexes, triplexes, fourplexes that you can choose from in your market.

Then obviously for short-term rentals, going into this conversation I thought that it wasn’t something that you could do everywhere, but as you explain, as long as you’re super-creative, you can Airbnb out a piece of dirt, so that answers that question…

Something else I wanted to talk about too, just to wrap up here, because it’s a very insightful conversation… Personally, I just moved to Tampa, and we go at the beach all the time now, and it’s still just amazing; I can’t believe I live here, this is insane. I’m used to living in Cincinnati, so… We got here in January, it was snowing there and we came to sunny beaches… But there’s so many cute little beach towns down here, and you can see that there’s obviously vacation rentals down there. If you consider buying a single-family house — not necessarily on the beach, but in one of those beach towns, and then furnishing it, and then when we’re not there, Airbnb-ing it… But then it’s something where, well, what if you just Airbnb it during the week, and then on the weekends we just literally live down there? After work we just drop down there…

I know we’d make more money renting on the weekends, I’m assuming, but still — again, it depends on how creative you get… But that’s something we were considering doing, so coming into this conversation, I was thinking in the back of my head the entire time, it’s like “We could totally do this.” We could have a beach house, but make money if we’re having a beach house.

So there’s that, but then I know there’s one thing that I wanted to hear from you, which is — what did you call it…? You called it the Ultimate Leverage Strategy. Do you wanna just hit on what your Ultimate Leverage Strategy is?

Sue Hoyuela: Okay, sure. Oh, and by the way, more power to you, because if you decide to go with that beach property, you’ve got the best of both worlds. You can stay it in when you want, and go back to your other house when you don’t want, or rent it on the weekends, or once a year, or whatever; you’ve got all the options open to you, so… I wanna see what happens with that. Keep me posted.

But the Ultimate Leverage Strategy came about because I teach people how to make a six-figure income with Airbnb, renting rooms and spaces in their own house; they can make $1,000 to $10,000/month… I’m showing landlords how to trade their long-term tenants for short-term guests, eliminate eviction headaches, and double or triple the rental income on their rentals. But then, people kept saying “What if I don’t have a property? What if I don’t have enough startup capital to furnish a place?” and I said “Well, there’s an answer to that.” You can actually get in on the Airbnb game and you can start an Airbnb business that you get paid for to start.

When people wanna start a business and they start asking “Well, how much is it gonna take?” and if you’re looking at buying a property, well, 3%, or you’ll have to go out and get a loan, 250k, or maybe it’s zero to start… No, this business model, the Ultimate Leverage Strategy, you actually get paid to start your business, anywhere from $500 to $2,500/property. So it’s a pretty powerful strategy, and it’s providing guest management services to busy property owners and landlords.

In contrast, I guess the newest model I’ve been hearing about lately is “Oh, let’s use other people’s property”, but when they say that, they’re actually going out and renting a property, and then subletting it on Airbnb, which… I’ve actually been approached by pretty smart landlords, and they’re like “Hey, why don’t you just give me a flat fee per month and you keep whatever else you make on top of that?”, which I do. That works, too.

But the way you can get in on this without having to have that monthly payment, or paying utilities, or have to worry about any expenses – zero cost out of pocket – is just partner with those busy landlords and property owners by providing the guest management services. So if anybody out there is an Airbnb host right now – little light bulbs are going off like crazy – and if you don’t already have experience doing that, I have a course called the BnB Freedom Formula that teaches you how to become that Airbnb expert, so that you can start to offer those services and create a six-figure income from your own Airbnb business.

The beauty of it, because there’s no cost to you, is it’s unlimited in the scalability. You can grow this as big as you want. I teach you how to outsource all of the different pieces of it, so that it doesn’t depend on you, and I give you the pieces to fill in as your inventory grows, so that you have unlimited capacity.

It’s a very exciting business model, and it’s been blowing it out of the water because so many people haven’t been able to get in the Airbnb game until now, so… Thank you for letting me share that.

Theo Hicks: That’s awesome. From my understanding, you’re like an Airbnb property manager; you’re acting as the property management company for example for people like you – you didn’t want to do anything… Not anything, but didn’t wanna do the day-to-day activities. From my perspective, as a long-term landlord, I’d be like “I need to find a regular property management company”, whereas if I was an Airbnb host and I was sick and tired of dealing of dealing with cleaning toilets, as they always say, you’d get this Airbnb Guest Services, or what did you call it…?

Sue Hoyuela: Guest Management Services. That’s a business model that I’ve developed. It’s not endorsed by Airbnb or anything, but I use Airbnb as the tool to deliver my services. I’ve been training people how to provide those services as well, so that they can actually tap into that additional income and get paid. Actually, all you are asking about how much you make, right? So with the Airbnb management, it’s more 20% to 50%, because you’re right, we increase the income so much, but it’s still a smaller slice that it would have been at 10% on a long-term rental.

Theo Hicks: Yeah, so if you’re a property management company, or if you are either interested in starting a property management company, this is something you should definitely be interested in and pursue further… Because if you’re making 20% to 50% on a revenue that’s five to ten times higher than what it would be otherwise, then you’re gonna be able to scale a lot faster.

Sue Hoyuela: Yeah, absolutely. And I just need to make sure that people understand – if you are a property management company already, this is a beautiful tie-in… Why not just start offering this additional service? …save yourself a lot of time on screening and all that stuff. You can probably reduce your number of employees, and save some money on your overhead, who knows. But in order to do the guest management services, it’s not technically property management, so you don’t need to have all the licenses and permits and everything involved. Because of the way I set it up, you’re not handling any of those things technically, so that you are free to just go out and start your business without any restrictions.

Theo Hicks: Awesome. I think we should end the debate portion with that powerful strategy. Before we wrap up, I want to just quickly look — I’ll ask you some listener questions. We had a question earlier from [unintelligible [00:47:54].29] so we really appreciate that. We’ve got a second question from Grant – it’s something we talked about way at the beginning of the conversation, so I apologize for that, Grant… But he asks “What happens to an existing Airbnb property when a town or city outlaws Airbnb? Do you have to show down existing Airbnb’s, or can you just not create a new one?”

Sue Hoyuela: Good question. Yeah, so it’s happened to folks… They’ve been in a zone where it’s not just like they changed the laws and said “Now you have to get a permit” or “Now you have to comply”, but they’ve actually said “Nope, it’s banned.” So unfortunately you do have to stop doing Airbnb short-term rentals. But short-term rentals, again, mean anything under 30-day rentals, so a landlord, if you own that property, you’ve got so many options open to you, right? That’s the nature of real estate – we’re always looking for higher and better uses for it, and there’s a ton of them.

So you have all the options open to you – you can go back to long-term rentals, or even there’s an in-between… Something that’s really fun is corporate rentals. Business travelers – sometimes they need to stay for 2-3 months; traveling nurses, people who need a short stay, but longer than 30 days – you can still do that no problem, and you will be compliant with the “No Airbnb”, which is actually “Nothing less than 30 days” is what they mean. So you still have a lot of options open to you.

Theo Hicks: It makes sense. Alright, Sue, I really appreciate it. Just to kind of quickly summarize what we’ve talked about… We were doing Airbnb/short-term rentals vs. long-term rentals, and we were comparing them across a variety of different factors. In regards to returns, for short-term rentals you’re looking at approximately three times as much rental income, compared to long-term rentals. The only potential drawback is the fluctuations, but again, with a little creativity, you can fix that. For long-term rentals, you’re not getting as high of returns, but you do have that consistency.

In regards to barrier to entry, which is much of a surprise to me, you can do these anywhere. You can do it in a city, depending on the rules and regulations, you can do it in the suburbs – which, as you said, is one of the main places you can do it – and then, again, my favorite part of this conversation, is the dirt. You can literally Airbnb dirt, so people can ride around on their dirt bikes.

Then obviously for long-term rentals, you can do them anywhere, as well.

We talked about the time commitment, and you gave us three things in particular that you can do to reduce the time commitment, and I went over a couple of stories of my progression through managing the property I lived in, managing properties I didn’t live in, to finally ridding myself of all responsibility and giving it to a property management company who’s doing a great job.

We kind of hit on competition a little bit, and then we wrapped up with the Ultimate Leverage Strategy, which is essentially property management for Airbnb, but with insanely much higher returns.

I really appreciate you being here. Everyone listening, thanks for tuning in. Where is a good place people can learn more about you, learn more about the information you’ve talked about today, and learn more about your short-term rental strategies?

Sue Hoyuela: They can find me at SueHoyuela.com. We might wanna put that in the show notes, because it’s kind of hard to spell… But hey, my name is right there on the screen, so if you can spell it, suehoyuela.com – that’s a great place to learn more.

Theo Hicks: Awesome. Well, thank you again, thanks everyone for listening. I hope you guys enjoyed the first ever Best Ever debate, and we will talk to you guys soon.

Matt has shared his lessons learned quite a bit already through his own podcast, Epic Real Estate Investing. Today he joins Joe on the Best Ever Show and explains how anyone can create residual income through real estate investing.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Matt Theriault. How are you doing, Matt?

Matt Theriault: Very good, Joe. Good to be here.

Joe Fairless: Yeah, nice to have you back on the show, my friend. Best Ever listeners, you recognize Matt’s name and voice probably because he’s been on the show a couple times. The first time was an episode way, way, way back – episode 86! I have no idea what episode number this is. I know it’s in like the 1,300’s, so it’s been about 1,200 or so days since we last talked, at least initially… We’ve talked I think since then, too. Welcome back to the show, my friend.

Matt Theriault: Thanks, and congratulations on so many episodes.

Joe Fairless: Yeah, thanks a lot. A little bit about Matt, just as a refresher – he was a marine, and he is a Desert Storm vet, so first off, thank you for your service.

Matt Theriault: You bet.

Joe Fairless: And he also enjoyed 15 years in the music industry prior to becoming an accomplished real estate investor. He’s got a podcast, he’s got a website you’ve gotta check out, EpicRealEstate.com (if you haven’t already). That’s also in the show notes link. He’s based in L.A.

Today we’re gonna be talking about how to create passive residual income – that is a skillset that we’re gonna be talking about today, because it is Sunday, and we’re doing a special segment called Skillset Sunday, like we normally do on Sundays.

With that being said, how should we start our conversation?

Matt Theriault: [laughs] Yeah, I get e-mails like that, like “How do you sell a house?”

Joe Fairless: Right, yeah.

Matt Theriault: How should we start the conversation? Well, I guess maybe start with why you would even want to create residual income.

Joe Fairless: Yeah. From your standpoint, I think wanting to create residual income – or for anyone’s standpoint – that’s most people’s goals, but the challenge is most people have a certain amount of money to invest, and we’ve got to do it intelligently so that we maximize the return on time and on our time, so what’s the approach you take us through?

Matt Theriault: Well, I think in any real estate investing strategy, regardless of what it is – apartment buildings, or mobile homes, or storage facilities, or single-family residence – I think every single strategy begins with find the deal. You’ve gotta find a deal, preferably with equity already in place. Secondarily, one that’s gonna meet your own minimum deal standards, that’s gonna get you to your goals the fastest. And if your goals are to create residual income, then you have to set some sort of barometer, I guess, on what type of deal is gonna get you there the fastest.

And then also just shifting the mindset, shifting that mindset from saving piles of cash to creating streams of cash is a big shift, and it’s easier to say and easier to think about and come up with the idea that that’s a good idea, but actually taking action on that on a daily basis can be really difficult.

For example in our office, on a daily basis, we’re faced with the decision – do we flip this property and put $30,000 in our pocket, or do we hold on to it and put $300 a month in our pocket? That’s a really tough decision to make, particularly when you’d actually be staring at that pile of cash… Because most people would wanna flip the property and take the 30k, thinking that they’re progressing and they’re moving forward, and in all reality, when you start doing the math, you’re actually taking a much longer path to get your residual income goal, because you probably have to flip ten of those properties to put that money in the bank somewhere, earning a 4%, 5%, 6% in something very traditional, to generate that $300/month of passive income… Or you can just hold onto that one deal and create $300/month of passive income.

I think once you start getting that math and understanding the seemingly slow route and small cash route is actually the fastest route to get you to your residual income goal, I think that’s a big barrier for a lot of people to overcome.

Joe Fairless: Is there a certain point where we should switch from the piles of cash to then creating a stream, or should we go straight out of the gate creating streams.

Matt Theriault: Yeah, I think with every deal you find, it should be your intent to hold it. That should be the intent. Now, it’s not always going to be feasible or practical to do so, but I think you should look at every deal “How can I hold this?”

If you think back and you go 20 years ago, and compare what your life would be today if one path you chose “I’m gonna flip 20 properties” 20 years ago, or “I’m gonna buy and hold 20 properties” 20 years ago, where would you be today? Even if holding each one of those properties was an extreme struggle to do and you had to play all resources and all ingenuity and everything you could, and even make sacrifices, where you’d be today would be just a significantly different place, a much better place.

Joe Fairless: And with that approach – there’s pros and cons with every approach – the con would be that you won’t get… Well, I’m about to correct myself, so let me just go with the initial thought, and then we’ll say how this could be a solution… But the con could be perceived that you’d go get the streams of cash slower, because you’re not selling the properties, but I imagine your answer is cash-out refinance.

Matt Theriault: That, or the streams of cash – one comes from work, and one comes from management, right? So to create those big streams of cash faster, like that $30,000 flip – once you flip it, you’ve gotta go find the next deal. So you’re constantly working. You’ve got a job, a high-paying job albeit, but it’s still a job; you’re never gonna get to take your foot off the gas. So with residual income, it seems slow – $300/month on that first deal, that’s not gonna make a significant impact on anyone’s life; it’s not gonna change anyone’s lifestyle too much. But if you wanna get to $10,000/month, you have to get the $300 one out of the way, so you can put the next one to create the $600, to do the $900. Then once you’ve got four or five of these things under your belt, now it’s all really starting to make sense.

Joe Fairless: I’m thinking about when I got started, my situation – it took me 2-3 years to save up $20,000, I bought a house, and that got me $150-$200/month in income. And if I would have — instead of buying more of a turnkey property, if I would have bought a value-add deal and successfully increase the value of the property and then did a cash-out refinance and held the property, then I could have gotten farther faster, versus what I did initially… I just bought basically four turnkeys, and it took me about — first one a couple of years, and then the one after that a year to save up money for each of the next ones. So I could have gone faster if I had done more value-add deals and did the cash-out refinances.

Matt Theriault: True. And choosing that path and going turnkey – I actually buy turnkey properties myself these days, just because I don’t feel like doing all the work all the time… But going that route, you’re paying a premium for someone else that has gone out and found the deal and found the equity, and they’ve marked it up and given you something, they’ve given you this finished product.

The way to do that a lot faster when you’re talking about saving money – that’s the mentality of a lot of people… They think they have to make a lot of money and save a lot of money to start buying these properties… But if you go out and get your hands dirty and you get a little bit more involved, and you’re actually sourcing the deals yourself, you’ll find that it’s a difficult thing to do, and because it’s a difficult thing to do, it holds a lot of value in the transaction… Meaning that you might feel like money is the hard part for you – just recognize that for somebody else that’s the easy part for them; find the deal is the hard part for them, where it could be the part that you focus on, where that’s where you bring the value to the table.

So you can really accelerate by just contributing different aspects through the transaction, and there’s a whole lot of value in finding the deal, and it doesn’t take $20,000 to find every single deal. So that’s another approach to do it and really accelerate your progress in that fashion.

Joe Fairless: We’re talking about creating passive, residual income… With your personal portfolio, how would you break out the categories by percentage for where your passive income is coming from?

Matt Theriault: I was just asked this question a little while ago… It’s about 60% of single-family homes, 40% notes on single-family homes.

Joe Fairless: Got it. So no commercial stuff. How come no commercial?

Matt Theriault: I went down that road and I fell on my face miserably, so I came back to what I know, and now I am much smarter and experienced, so we’re getting ready to pull the trigger again on commercial… But I just got started with single-family, I got good at it, and so that’s why it’s there.

Joe Fairless: And what have you done differently as you’ve started, to now where you’re rockin’ and rollin’ with the single-families, that you can share with us, that will help us get better if we are investing in single-families?

Matt Theriault: Really when it comes down to — and to all passive income… A lot of people income passive income with uninvolved income, and that’s a big mistake. You still have to manage it, and I think the secret to cashflow, regardless of what the asset class is, is the management of the asset. Property management – you’ve gotta do as much due diligence on your team, on your property manager, as you do on your properties themselves. So that’s where we’ve made a lot of mistakes, but we’ve been able to pull it all together to where now it works for us.

So people will look at diversifying their asset class, they’ll look at diversifying their location… I’d recommend everybody diversify their teams as well. In every market – this is what’s really made it work for us – we’ve got at least two property managers. We make sure that they know about each other; not in a evil, mean-spirited way, not in a gross, ugly, competition way, but we do make them know that we’re working with somebody else in their market… And what we’ve found is it inadvertently just kind of forces performance to go up, it forces expenses to go down, and you just get better service. That’s probably the biggest thing that we’ve been able to put in place, that has increased and stabilized the performance of our properties or our cashflow.

Joe Fairless: You mentioned diversification of asset class, teams and locations. Clearly, you’ve got the diversification of teams that you’ve just mentioned… It doesn’t sound like you do with asset class, and then what about locations?

Matt Theriault: So the asset class – I’ve got notes and properties, so that’s the diversification there… And we’re looking to go back into commercial. So I’ve got single-family and notes, and we’re gonna be back into commercial, so that’s our diversification of the asset class.

The diversification of the geography – we’re in 12 different markets across the United States, so we’re probably most diversified in the location than anything else.

Joe Fairless: When you look at a market, what are some of the characteristics that you look for?

Matt Theriault: Good question. We look at all the normal stuff that everyone else looks at. We look at what is the job space like, is the industry diversified, the major employers diversified? What’s government contributing? What’s the migration and the population look like? We look for all that stuff that everybody else looks at… But what really determined whether we go into a market or not is the relationship with our team, the property management.

You can find the best market, with all the market indicators that point up and give it a green light, and you go in there with bad management, that’s gonna be a terrible experience for you.

Joe Fairless: So true.

Matt Theriault: You can go into a mediocre market with a great team, and that can be a fantastic experience for you?

Joe Fairless: What type of properties? Can you give us an example of maybe the last deal that you bought? What type of property is it, from a single-family standpoint? Returns, that sort of thing.

Matt Theriault: We’ve just picked up a single-family in Birmingham, Alabama. I like that market. We happen to have our best team there, but I also like the market, because over the years we’ve had a good experience of cashflow and appreciation, which is kind of hard to find in the same market. But it’s like a 13% cash-on-cash return, with leverage in place, in a nice neighborhood; I’d call it like a B-, B neighborhood… Good tenants, good management… It’s been really easy. I think we’ve got a dozen in Birmingham now. I really like that market.

Joe Fairless: With taking a giant step back – our conversation is around creating passive residual income, and we started out by talking about finding a deal that meets your goal, and then you said instead of creating piles of cash, you create streams of cash… So from a Best Ever listener standpoint, what would be some practical steps coming out of this conversation that they can do to create that residual income?

Matt Theriault: Practical steps… I would say the first step is focus on finding the deal, and recognizing that 95% of all real estate transactions that happen are conducted through people that want to sell. No one in their right mind is gonna give you a deal on their real estate unless they need to sell, so you need to look for that 5% that need to sell. There’s some sort of distress in place – there’s financial distress, there’s personal distress, or the property itself is in distress… And just kind of going with the mindset, understanding that people will exchange equity for peace of mind.

So I think the first practical step is identify the type of problem that you want to solve for people… Somebody that just went through a divorce, or somebody that just went through bankruptcy, or someone that’s in foreclosure, or someone that has liens on their property, whether they’re tax liens or [unintelligible [00:14:39].28] or code violations…
So identifying the problem that you’re going to solve, and then promote the solution to that person of what they’re looking for… And come to them as being the white knight on the horse, and they’re gonna give you equity in exchange for being that person. So I think just identifying who’s the person you’re gonna help, and deploy all resources in helping that person, so you can get that deal under contract.

Joe Fairless: What’s been a challenging problem that you and your team have solved for a person?

Matt Theriault: A challenge for a person?

Joe Fairless: Yeah, for a property owner… They had a really challenging problem.

Matt Theriault: One that comes up frequently is someone that inherited a property and they live on the other side of the country, and they don’t feel like flying out to see the property, to try and hire a realtor and sell it. They just want the cash. That’s something that comes up frequently, and that’s pretty easy to do.

Another one is — recently, someone had a job transfer, and they had to get up and go, and they had no time to go and sell their property through conventional channels… And what we were able to do is put that property on the market for them, and find an investor/buyer for them, but in the meantime, while we were looking for them, we were able to pay for their moving expenses and storage of all their belongings that were in their property.

That cost us I think $1,000 for the three months that we were storing their personal property from the house, and then I think we paid like another $2,000 for their first and last month’s rent, to move into their apartment… So we put in $3,000 there, and that probably got us another $20,000 discount on the sale, for the purchase of the property.

So those types of problems, people are like “Just make this go away for me, so I can get on with my life”, and they’ll gladly sell to you at a discount.

Joe Fairless: On the commercial real estate front, what happened?

Matt Theriault: The first thing was I went in buying a 14-unit, thinking that “Hey, how difficult could this be? Just 14 houses underneath one roof.” I just kind of did not understand the nuances of managing an apartment building… And when it seemed like that one was going good at the beginning, I went wide too fast; I went on and bought a 50-unit building, a 44-unit building, and 8 and a 12, all just because they kept coming to me, and they were so cheap.

But [unintelligible [00:17:02].28] way wide before I went deep and figured out how to make it work, and it just caught up to me.

Joe Fairless: And what are some specific things that now that you’re getting back into it you’re gonna do differently for making it work?

Matt Theriault: Definitely do a lot more due diligence on the front end, with regard to expenses and what the actual costs are to owning that property. Be prepared to pay double what the rehab budget is… It doesn’t necessarily means I’m going to, but I need to be prepared for that. And third would be to really vet whoever is going to manage that building for me.

Joe Fairless: And when you really vet them, what will you be doing differently that you weren’t doing before?

Matt Theriault: Giving them small tasks up front. One of the things we do for our property management now is we have a list of questions – I think we just googled it… Questions to ask property managers. It’s really the process of asking the questions, not the questions themselves that we’re looking for. So we’ll ask four of the six questions that we’ve got over the phone, just to kind of get a feel about the personality and the vibe…

They’re always gonna tell you what you wanna hear on that first call, so you never know if you’re getting the truth or not… But then we’ll call back after hours and leave two more questions on their voice mail, and wait to see what their response is. So that’s one of the small things that we do. We’ll do a lot of things — “Hey, if you were in my shoes, what would you do?” type questions.

With our single-family, I don’t know how this is gonna be different or how we’re gonna pull something off equivalent with the multifamily, but with our single-family we just give them one property to start with, and then we just micro-manage the hell out of them, and if they don’t like it, then they’re not gonna be the person for us… But if they do good, then we’ll start giving them more and more, and the more that they prove themselves, the less we’re breathing down their neck.

Joe Fairless: You’ve mentioned throughout our conversation “we” and “us.” Who’s on your team and how do you have it structured?

Matt Theriault: Good. I work with my wife, Mercedes, and she has a full-time assistant and transactional coordinator. I have one person for my marketing, Miguel, and I have one person for my systems and automation and managing the database – William. Then I’ve got a media team that provides Miguel with all the marketing materials.

Joe Fairless: The systems and database that William works on – what types of systems and databases (or database) do you use and find effective?

Matt Theriault: I found a system called REI Solutions. It’s a CRM and marketing machine all underneath one little umbrella. We went out and we tried the Podio thing, and it just kept on breaking on us, and we became more in the IT business than we were in the real estate business, so we just went with something ultra simple. So REI Solutions is what we do… It actually has the whole call rail engine inside of it. It’s got the testing features, it’s got landing pages, it’s got websites, and then it’s got project management… That just all works as one cohesive unit inside of that system.

Joe Fairless: Anything else that we haven’t talked about as it relates to building streams of residual income, that you think we should?

Matt Theriault: Just make it your intent to hold everything. It doesn’t mean you have to, but just make it your intent, and understand your marketing efforts and your deal-finding efforts – it’s not always going to produce stuff that you want to hold or that would be holdable, but there’s still alternatives of where you can make money on that… So don’t be afraid to flip a property or flip a contract. I think every business needs active income as well, while they’re building their passive income. I just wanna make sure that that’s clear – it’s your intent to hold everything, but a lot of times you’re not going to, so you might as well make some money off of it anyway.

Joe Fairless: Yeah, and you sell and then do a 1031 exchange, assuming that the numbers work out.

Matt Theriault: Totally. There’s endless things that you can do once you have the deal. That’s why I place so much emphasis on finding the deal. Because once you’ve got the deal under contract, now you’ve got all kinds of options.

Joe Fairless: Matt, thank you for being on the show. How can the Best Ever listeners get in touch with you or your team?

Matt Theriault: If they’re listening to this podcast, then you can go to Epic Real Estate Investing Podcast. The domain name of the website is epicrealestateinvesting.com. Either one is a great way to get in touch with us.

Joe Fairless: So when we come across an opportunity to make 30k or $300/month or something similar to that choice, we’re now gonna pause and think about this conversation… And think about creating streams of cash instead of piles of cash, because eventually we have to get to the $300 if we’re gonna get to the $10,000 or a million dollars a month, or whatever our goal is… So we’ve gotta start somewhere, and there are ways to access that equity even when we have a hold. Or if we do sell, then 1031 or other ways — so it’s just a thought process that you’re talking about. It should be our intent to hold it, and then we’ll maximize the opportunity as we have the opportunity.

Then also I love that you went into the three updates to your approach on commercial investing, the due diligence on the front-end, being prepared to pay double for what the rehab is, and really vet the management team… I love the example of calling after hours and asking questions to see what their response is from a time standpoint, but then also from a quality response standpoint, so thanks for sharing that.

Thanks again for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Chris was a lead FBI hostage negotiator for 24 years. The amount of negotiating knowledge he has is unprecedented. ANYONE can find value in this episode, you can never have too many negotiating tips you can use anywhere.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Chris Voss. How are you doing, Chris?

Chris Voss: Fantastic, Joe. Thanks for having me on?

Joe Fairless: Well, my pleasure. Nice to have you on. I’ve got a daily podcast, so I interview a bunch of people, and I always ask “What’s the best ever book you’ve read?” and lately I’d say about 20%-25% have been mentioning your book.

Chris Voss: Wow, that’s very cool!

Joe Fairless: They love it, yeah. Real estate investors love your book. The book is Never Split The Difference. It’s a best-selling book, and certainly among the real estate community it’s a very popular one. I have bought it and I didn’t know I was interviewing you today, because if I did, then I would have done some reading on it… It’s still on my shelf, I’ve gotta read it. So I’m really excited to talk to you about it. So many people who we’ve interviewed have read it, and as a result, I bought it and I’m looking forward to reading it.

Chris is also the founder of the Black Swan Group, which is a firm that solves business communication problems. He has a background in hostage negotiating. He was a lead FBI hostage negotiator, and then he founded the Black Swan Group. So let’s talk about first your background… Do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?

Chris Voss: Yeah, sure. This is about applying hostage negotiations to business negotiations, and your personal life too, because so many times your family members take you hostage. I’m originally a small town Midwestern guy, son of Richard Joyce Voss from Mount Pleasant, Iowa; a town of about 7,000 people. My father was an entrepreneur, so I grew up in that environment, always thinking like an entrepreneur, as a businessman.

I became an FBI agent, worked in counter-terrorism, counter-kidnapping my whole career, and ended up being responsible for the negotiation strategies of every American kidnapped overseas for about seven years. So in trying to get better at that, I turned back to the business negotiating world first, Harvard Law School, to help us get better. When I went through the course at Harvard Law, they said “Look, you’re doing the same thing we’re doing, you’ve just got better stories.”

Then while I went through there, I just used my hostage negotiation stuff on the Harvard lawyers and did really well, came out with the upper hand most of the time. So I started teaching in business schools when I left the Bureau in 2007. I’ve been doing business negotiation coaching/teaching/training ever since.

Joe Fairless: Let’s talk about the negotiation of a kidnapping overseas that you took the lead on. If an American was kidnapped overseas, you were taking the charge on that negotiating. What’s your approach? And I know we can easily tie this into business too, but I just wanna hear what your approach is in that situation.

Chris Voss: It’s pretty easy, really… Kidnappers are businessmen. The business they happen to be in is kidnapping, but they’re commodities dealers, and they’re like any hard-bargaining negotiator that you will run across anywhere. So they’re remarkably susceptible to deference, as are all people. I like skills that work 360 degrees with everybody; deference is one of those skills. And they wanna be in charge, they’re control freaks; control freak negotiators are really easy to deal with, because all you’ve gotta do is make them feel like they’re in charge, and you drop their guard… Because they wanna be in charge.

Then we’d just call that empathy, now I call it tactical empathy, because we know how to get through people’s reasoning and get at their emotional architecture, if you will… And get them to feel like they’re in charge, and get them to make deals. So we just used weaponized empathy on them. [laughs] Made them feel like they were in charge, made them feel like they were calling all the shots. Then the kidnapper will let a hostage go when they feel like they’ve gotten everything they can, which is what everybody else in business will do – they’ll make the deal when they feel like they’ve gotten everything they can.

Now, there’s a real distinction between whether or not they GOT everything they could and whether or not they FELT like it. So my job was always to make them feel like it, and we’d cut a deal, that they’d stick to – that’s the other important thing. You’ve gotta cut a deal that they’ll stick to and that also, if you run across them again in another environment there, they’re happy to deal with you. So you can’t have bad blood, you can’t lie… It’ll catch up with you. You can’t deceive, you can’t [unintelligible [00:06:32].00] Interestingly enough, you’ve gotta be really genuine.

Joe Fairless: Let’s just play this example out and then we’ll switch into business; I know you’re overlapping the two, so it’s great… But what is a deal that you can stick to that a kidnapper overseas would feel like they got everything they could? What do they receive?

Chris Voss: Well, international kidnapping is about ransom, so they’re gonna get a payment. Now, what you wanna do is you’ve gotta run it like a sting operation. Basically, it’s the same reason why banks have dye packs. You give bank robbers money, so you get people out of harm’s way, so they’ll leave the bank, but most importantly, so that you plant evidence on them. Now, there’s a possibility that the bank robber is gonna get away with the bank robbery money anyway – that’s why you don’t give them all the money in the vault, you just give them enough to make them happy so they’ll go on their way, so that ideally you can follow up afterwards to not only scoop them up, but scoop up everybody that they do business with illegally. But you have to run it as if it’s gonna take a while to catch them, so you don’t wanna put too much money in their hands.

An international kidnapping is about tough as nails, bare-knuckle bargaining, without making the other side mad, and without making them feel out of control. It’s about top bargaining in a really soft fashion, that’s what it’s really about. Then you cut a deal, and then also you’ve gotta pay and then they’ve gotta comply. It will be like any business deal where you pay the other side all the money upfront, and then wait for them to comply. So you have to know what somebody looks like when they’re telling the truth, and you have to know the tiny little emotional/psychological edges that capture every single edge, so that the kidnapper, once they’ve got the money, they’ve got [unintelligible [00:08:21].12] the hostage go, whether or not they let the hostage go, as per their agreement. So it’s cutting any deal where the other side is gonna comply because they feel like they got everything they could. You pay them, and they’re gonna let the person go, as agreed to.

What are you gonna do? Are you gonna sue a hostage taker for not letting somebody go? No. You’ve gotta make implementable deal that the other side is happy with, that they feel like they got the best deal they possibly could.

Joe Fairless: With the tough bargaining in a soft fashion so that you don’t make people mad – is that where the tactical empathy comes into play, or are there other things to accomplish that?

Chris Voss: Yeah, different applications of it. Tactical empathy is a primarily emotional trigger, it’s what makes people feel good; it’s learning how to say no without saying no. The book starts with (in the first five pages) when I first went to Harvard Law School, I sit down with the head of the program on negotiation, Bob [unintelligible [00:09:15].28] and I know what he’s angling for, because I can smell it. He wants to do a role-play with me, he wants to see if I’ve got any game. So he says “If you negotiate with a kidnapper, what kind of strategies do you use?” So I give him an answer that makes me sound weak and innocuous, and I say “You know, we’re just asking open-ended questions, that’s all.” And he goes, “Really!?”, and he kind of laughs. He says, “That’s it?”, I say “Yeah, we’re gonna ask him open-ended questions.” Now, I’ve got some ridiculously powerful open-ended questions, but he doesn’t know that because it sounds like it’s something that’s stupid and simple, and he’s not impressed with it.

It pretty much happens wherever I’m in a new environment. They go, “You’ve gotta be kidding me. That would never work fine.” So he literally calls a couple people in to watch. He gets a tape recorder, and he looks at me and he says, “Alright, Voss, we’ve got your kid. Give me a million dollars by tomorrow morning, or we kill your son. I’ve got your son and I’m gonna kill your son. Give me a million dollars.” And I look at him and I say, “How am I supposed to do that?” Just like that. And he kind of blinks a couple times, and he goes, “No, no, we’ve got your kid! You don’t understand! We need a million dollars, or I’m gonna kill your son.” Now, already I’m listening, and he doesn’t know it. Because his initial intention was to make a demand and get off the phone. I’ve already extended the conversation, he feels in charge; the secret to getting the upper hand in any negotiation is giving the other side the illusion of control, which is the point of that question that I just asked. It triggered something that Daniel Kahneman calls deep thinking, which slows him down, doesn’t make him feel threatened, but he doesn’t know that I’ve already boxed him in.

And then I say, “How do I know that my son’s alive? How am I supposed to agree to pay you if I don’t even know he’s alive? How am I supposed to pay you if I don’t know you’re gonna let him go? How do I know you’re gonna let him go?” Just one, after another, after another.

This goes on for a little while, until finally one of the people watching says “Don’t let him do that to you!”

Joe Fairless: [laughs]

Chris Voss: And he looks at her and he says, “Well, you try it!” And she says, “I have your kid! A million dollars! Tomorrow morning!” I say, “How am I supposed to do that?” We start over again. “How am I supposed to do that?” is the number one way to say no in negotiation. You’ve gotta say it deferentially, because what’s said with deference, you’d be amazed what you can get away with saying. And the other side feels in control, they don’t know you boxed them in.

Joe Fairless: Since we’re real estate investors on this show, let’s say we’re talking about a deal… It’s a house, it’s worth $300,000, and the seller says “I want $400,000.” I say, “Well, how am I supposed to do that?” in a deferential, warm and fuzzy way. Then they’ll say, “Well, you get your checkbook and you write out $400,000, that’s how you’re supposed to do that.”

Chris Voss: Alright, you know what? You’ve got an amazing house. You’ve put your hopes and dreams in that house, you had cherished memories there. Cherished memories of the past, your hopes and dreams of the future… It’s a beautiful house, it’s worth every penny of that. It’s probably worth more than that; I’m really embarrassed, because… But how am I supposed to do that?

Joe Fairless: Well, you write a check for $400,000, and that’s the amount you pay.

Chris Voss: And it’s worth it. I mean, it’s a beautiful house, but how am I supposed to do that?

Joe Fairless: [laughs] I would almost think you’re a little loony, because you keep repeating that. You just write a check, and that’s it! I mean, I don’t know how were you planning on buying it in the first place if you weren’t gonna pay for it?

Chris Voss: Well listen, how long do you want your house to stay on the market? Because no one can do that.

Joe Fairless: I’d like to get it sold pretty quickly.

Chris Voss: Yeah, do you wanna fail?

Joe Fairless: No, I don’t wanna fail. That’s not an option.

Chris Voss: Your house is a fantastic house, and I know that from your perspective it’s worth way more than what you’re asking, but it’s gonna stay there as long as you’re asking that price. How long do you want it to stay there and not sell?

Joe Fairless: Well, I’d like to sell it pretty quickly, that’s for sure. And I also would like the price that makes sense for me, which is the 400k.

Chris Voss: Yeah, I mean… Why me? I mean, you don’t even have to be in this conversation, because I’ve already let you know that I can’t do that and you’re still talking to me, so it sounds like you’ve got some sense that nobody’s gonna pay you that.

Joe Fairless: Well, I don’t know. I guess it’s just something that I’m looking for, and if it’s not a right fit for us, then I guess it’s not a right fit.

Chris Voss: Yeah, you know what? You’ve been enormously generous with your time, enormously generous. I’m surprised that you’ve talked to me for this long at all… And you know what I’d like to do? With your permission, I’d like to have your permission to come back to you and talk if nobody else comes along.

Joe Fairless: Absolutely, yeah. That sounds like a good next step.

Chris Voss: Right. Okay, so a couple things here. First of all, you’re in your holodeck. Do you know what the holodeck is?

Joe Fairless: I have no idea.

Chris Voss: In Star Trek, the holodeck is the room where in our imagination we create whatever we want to have happen. So there’s a little bit of difference between a conversation that you’re imagining might happen, than one you’re in the middle of.

Joe Fairless: Yeah.

Chris Voss: So I didn’t make this “How am I supposed to do that stuff?” up on the spur of the moment. Actually, how you would have answered if in fact you weren’t gonna take anything other than 400k, instead of slowing down and saying it as slowly and gently as you would have, you would have said, “You know what, because if you want the house, you’ll pay it.” Now that’s an actual indicator when people are telling the truth — this is not 1000% correlation, but it’s a really high correlation… They get a lot more direct. It’s a great way when somebody’s testifying in front of Congress, when a congressional witness is being accused of nonsense that they haven’t committed, they look at the congressman and say “Because congressman, because that’s the way it is!” As an FBI agent I’ve learned directness and impatience correlates strongly with truth-telling. So you were role-playing a role that you weren’t feeling, and that’s why you didn’t say it that way. You said, “Well, you know, because…”

Joe Fairless: Yup. I buy that, for sure.

Chris Voss: You were a little slower, so you were a little out of character in a role, but let’s get back… What happens if the other side says what you’ve said, only more directly? That’s your job as a negotiator, actually to push you till you say “Because if you want the house, you’re gonna pay $400,000.” Because my job as a negotiator is not necessarily to make the deal, my job is to find out what the deal is there that could be made, and then decide if I wanna make it, which in that case I didn’t, but now the most important thing for me to do is — the last impression is a lasting impression.
Let’s say that you’re selling a house and the market says it’s worth 300k and you want 400k, and you’re genuinely not gonna budge off 400k, which means your house ain’t gonna sell… Which also means that eventually at some point in time you’ve gotta be willing to go back to somebody. The last impression I left you with was nothing but with respect and deference. The last impression is a lasting impression. I actually intentionally seeded our next interaction by instead of using the last word to say “Look, pal, you’re gonna beg me to buy your house someday when you come to your senses.”

Joe Fairless: Right.

Chris Voss: Which is a mistake that a lot of people make in negotiations. When they know the other side is crazy, they make the worst possible impression at the end, which is like, “Alright, fine, you’re gonna be begging me to buy this someday.” But instead of doing that, which is what people call cheap shots for last… We actually call this the Oprah rule. Oprah is the toughest negotiator on the planet. Is that her reputation? No.

I know someone who’s worked as Oprah Winfrey’s broker for 17 years, and everybody that works with Oprah, their overwhelming goal is everyone they interact with has to feel, especially at the very end, like they were treated exceptionally well, no matter how it went. And the Oprah rule is “the last impression is a lasting impression”, and it sets the scene for my next impression.

Let’s say you really are crazy and not coming off the 400k. I know that house ain’t gonna sell because the market is not for 400k, but I do know that I’m gonna get another crack at it as long as I treat you with respect and deference and empathy throughout — you noticed I used empathy every step of the way before I said anything?

Joe Fairless: Oh, absolutely. Yeah, it was soaked in empathy.

Chris Voss: Yeah, and so what that does is it sets me up for the next interaction, which when I come back around, your memory is gonna be like “Yeah, you know, that guy wasn’t that bad last time. He didn’t give me what I wanted, but he treated me really respectfully.” I don’t like where I’m at, but since I don’t like where I’m at, the only people that I’m gonna deal with are the people that made the least bad impression on me the last time around.

Joe Fairless: It makes sense. The takeaways I’ve gotten from this so far, to summarize this, is to have empathy, and just soak the conversation with empathy, but also do it in a genuine way, versus you trying to apply it when it’s not natural for you.

Chris Voss: Yeah, and there wasn’t anything that I said that wasn’t utterly true. Anyone in the real estate industry, when you’re selling a house — actually, a home seller has the exact same profile as the family member of a kidnap victim… And the real bread and butter of kidnap negotiations is how we handle the family members, because we would have the family members deal with the bad guys… And what does a child represent to their parents? Their cherished memories of the past, their hopes and dreams for the future. What does a house represent to the seller? Cherished memories of the past, hopes and dreams of the future. It’s the same psychological profile. And that’s what I said when we were talking – empathy in the form of utter respect for how you actually feel about this. Not agreeing with any of it, but just recognizing it. That’s cognitive empathy, it’s a recognition… It’s not adopting it, but it’s just recognizing what you feel. It’s not sympathy.

I know what that profile looks like, or I can pick it up really fast in any given industry, because whatever anybody does in any sort of business, their hopes and dreams for the future are on the line at some point. All I’ve gotta do is listen for it and respect it, and it gives me a tremendous advantage.

Joe Fairless: What’s been the most challenging negotiating circumstance you’ve been in, and how did you work through it?

Chris Voss: Well, the other side is negotiating in a fashion that is just not gonna work out for them, they’re not gonna get anything that they want – they’re new to it, they’re bad at it, there’s a deal here, and they’re just not seeing how what they’re doing is gonna screw everything up for them. That rarely happens in kidnapping, but it happens sometimes.

One of the cases I talk about in the book – interestingly enough, it turns out there’s a business term for what happened in that negotiation… I ran across salespeople that call it being single-threaded, where your point of contact is out of touch with their team, and they’re negotiating in a way that the deal is never gonna happen and they’re gonna lose their job over… Interestingly enough, since kidnapping is a business, that’s exactly what happened to the negotiator we were dealing with in the Phillipines. On the second go-around, the [unintelligible [00:21:05].22] and ultimately the hostages died, in a botched rescue attempt about 13 months after the kidnapping happened.

I ended up finding everything out about the kidnapping. The upside to a hostage negotiation is at the end of the day you’re gonna find out everything that happened on the other side through the follow-on investigation. And I felt “What do I do when the point of contact is out of touch with their own team?” And we actually developed some more openended questions, which we now call “calibrated questions”, that are just specifically designed to deal with what we call “deal killers” on the other side – people who won’t come to the table, because all they wanna do is kill the deal once it’s been made.

There’s no shortage — 50% of the business deals that don’t go through, don’t go through because the deal killers on the other side stayed away from the table just so they can torpedo the deal when it came to them… And you learn how to deal with that.

Joe Fairless: What are some calibrated questions?

Chris Voss: Calibrated questions are a version of an open-ended question. What it really is is “I need you to think about implementation”, which is gonna be “How do I know the deal is gonna go through? How do I know that if we make the payment under these terms, that everybody on your side is gonna do what they’ve gotta do?” Now, what your point of contact will say is “It’s gonna be fine, don’t worry about it. I represent everybody”, which is why you repeat the questions three or four times, because then it makes your point of contact nervous and they actually go back to their team and they say “Hey look, this is what they’ve been asking me, and I just wanna make sure I’m on firm ground here.”

What will happen is then the deal killers love the fact that they’re now being consulted, which is what they wanted all along. Now they’ll start to become engaged, and it decreases the chances that they’re gonna torpedo the deal.

Chris Voss: Yeah, it’s a good observation on your part, very astute. The open-ended questions are “Who?”, “What?”, “When?”, “Where?”, “How?” and “Why?”, right? Also referred to as interrogatives or “the reporter’s questions.” Now, we’ve pretty much cut them down to — “How?” and “What?” is our bread and butter. We’re really careful with “Why?”, because “Why?” makes people feel accused and defensive; you have to be extremely cautious with it; there’s only one tiny, limited, surgical instance that “Why?” is a good question. Most of the time, instead of asking “Why?”, instead of “Why do you want that?”, you should say “What makes that a choice?” Substitute “What?” for “Why?” and you’ll eliminate the defensiveness.

But they’re very deferential. People love to be asked “How?”, people love to be asked “What?” It’s a great way to gain the upper hand in a negotiation by giving the other side the illusion of control. So those are the two biggest ones that give you the upper hand, but the other side feels in control.

With enough practice, you can turn nearly any question into a “How?” or “What?” question. The other side is gonna love to answer it, because people love to tell you how to do stuff, and they love to tell you what to do… And that’s all part of the deference, giving them the illusion of control that gives you [unintelligible [00:24:15].27] advantages.

Joe Fairless: Anything else that you wanna mention as it relates to negotiating that we haven’t discussed before we wrap up?

Chris Voss: Yeah, the flipside to open-ended questions are labels, and in many cases – probably about in almost half the time, the best way to get somebody to talk is not with an open-ended question. You just switch it to a label, because you’ll open it up more. Instead of saying “What do you think?”, I’ll say “It seems like you’ve got something in mind”, and actually you’ll give me a lot better answer to that second one than the first one, just because it hits the brain in a different way.

So we use those, and then we train on it, how to flip back and forth. Because you’ve gotta gather information, and it doesn’t necessarily mean that the best way to gather information is by asking a question.

Joe Fairless: Got it. Great stuff. How can the Best Ever listeners get in touch with you?

Chris Voss: Our newsletter comes out once a week, it’s called The Edge. It’s free, it’s complementary. A friend of mine loves to say, “If it’s free, I’ll take three.”

Joe Fairless: [laughs] Careful what you take free three times… There could be some scary instances there.

Chris Voss: So send a text to 22828, send a text “fbiempathy”, all in one word; don’t let your spell check put a space in there. It’s gotta be “fbiempathy” all in one word. It’s not case-sensitive, so it can be lower case… To 22828. You’ll get a text message response back, signs you up for the newsletter. It’s a gateway to everything we’ve got.

Our website is blackswanltd.com. The newsletter will take you there. It tells you about the training products we have. If you wanna buy the book, which I strongly encourage, Amazon has the best price. I buy my book on Amazon, but I give it away. But subscribe to the newsletter. We’ll help you get better, we’ll help you learn a lot of stuff.

Joe Fairless: If I go to the website, which I’m on right now, where do I sign up for the newsletter on the website?

Chris Voss: There’s kind of a menu bar towards the top, and you should see it into the right of that. It says “Blog: The Edge.”

Joe Fairless: Yeah, I see it.

Chris Voss: Click on that, and it’ll take you right–

Joe Fairless: Oh, there we go.

Chris Voss: And you can search past stuff. You’ve got a search tool in there that can help you if there’s a specific thing that you’re looking for.

Joe Fairless: Great stuff, yeah. I am officially signed up. Well, this has been informative, and I’m grateful that you were on the show, Chris. As I’ve mentioned at the beginning, I’ve had a large amount of people being interviews, so high-performing real estate investors mentioned your book recently, and it compelled me to buy it… And coincidentally, my team booked you for the interview today too, so that was great. I had you on my list of people to reach out to anyway, so that’s great.

Some of the takeaways from this, as we can apply your lessons learned to real estate investing, and negotiating in particular – ask open-ended questions, in some circumstances… You mentioned at the very end the labels part. I think we’ll need to read the book to learn a little bit more about that. But what we talked about – open-ended questions, and using “How?” and “What?” Those are, as you mentioned, the bread and butter, and people love that. They love to talk about the how and the what; be careful with the why.

Also, be empathetic and use the Oprah rule of treating everyone exceptionally well at the end, because that really sets the stage for the next interaction. And really, one other thing we didn’t talk about when we were doing the role-playing back and forth – your approach put me in a state, it was almost like you were putting a trance on me… [laughter] It’s the way that you talk, and just the sound — you’ve got it down to a certain science, obviously. So that does something else [unintelligible [00:28:08].26]

Thanks for being on the show, I hope you have a best ever day. Oh, and lastly, two things. One is – because I have this in bold – directness and impatience correlates to people telling the truth. That’s really interesting. And then two is that you mentioned your job is not to make deal (and our job is not to make a deal), it is to find out what the deal that could be made is. That’s an important distinction, because we’re not always negotiating to get the deal done, we’re negotiating to identify what is the deal that could be made, and I think that’s an important distinction. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Hunter was always an entrepreneur. He started as a high schooler selling parking spots out of his backyard when there was an event going on. His first venture into investing was in the stock market. Hunter didn’t like that some many variables that were out of his control, could determine how much money he made or lost. Enter real estate. Now Hunter and his team syndicate opportunities, most notably self storage and mobile home parks. Today we’ll hear higher level tips and suggestions for investing in those two asset classes.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.

With us today, Hunter Thompson. How are you doing, Hunter?

Hunter Thompson: Joe, it’s an absolute honor to be on here. Thanks again.

Joe Fairless: My pleasure, and nice to hear that, that’s for sure. A little bit about Hunter – he is the founder of Cashflow Connections, which is a real estate syndication company. They have helped allocate investor capital to over 100 properties, which have a combined asset value of over 350 million dollars. He’s also the host of Cashflow Connections Podcast, and he is based in Los Angeles, California. Their website, where you can learn more about Hunter and his team, and their company and what they’ve got going on is CashflowConnections.com. There’s a link to that in the show notes page. With that being said, Hunter, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Hunter Thompson: Absolutely. My grandfather was a successful businessman in the ’70s and ’80s, and I learned a lot from him growing up, really from the legacy of just owning a business, investing in hard assets, and allowing compounding interest to create wealth. I was very much an entrepreneur at a young age.

I remember my parents lived next to a popular concert venue, and when I was about five or so these events were taking place, football games or concerts; parking the area would be just a complete nightmare and was really challenging, so I remember selling parking spaces out of the backyard for $10 or $20 and splitting the profits with my mom. That’ll kind of give you an idea of how I was growing up.

Then 2008 happened, obviously a paradigm shift for a lot of people. I knew that there was going to be an opportunity in financial assets just because price deflation had been taking place over all the sectors of the economy, but particularly financial assets. So my original interest was in stocks, but that later changed just because of the lack of predictable cashflow and the volatility in the market, and I remember — it wasn’t really until 2010 or so, that’s when the European debt crisis was taking place, and I remember watching CNBC, and the anchor was talking about the Greece bond yields; they were saying that if the Greece bond yields remained below 7%, that the S&P 500 was gonna be fine. But if the Greece bond yields went above 7%, the S&P 500 was gonna collapse.

I just remember watching the Dow Jones take 600 point intraday swings and thinking, “How is it the case that something completely complicated, unmitigatable that I just could never conduct due diligence on or control is playing a significant role in my financial well-being or my financial future?” and that’s what really led me into real estate.

In California in particular the market had been completely decimated, so when I started jumping in with two feet and going to 3-4 networking events a week, I was building relationships with probably 5-10 people at each networking event. But when the market recovered, I came to find out that because these were the people that had been able to weather the storm, they ended up being some of the most successful and influential real estate entrepreneurs in the state of California, and this is kind of unknowingly at the time, but that’s really what led me to start Cashflow Connections and leverage those relationships from my business and from my clients, and those relationships still play a huge role in my business today.

Joe Fairless: What is your business model?

Hunter Thompson: We syndicate opportunities for accredited investors. We identify asset classes that are poised to perform in either economic standpoint or demographic standpoint or something similar to that, and identify sponsors who are best in class in those particular asset classes.

Then we syndicate opportunities for our investors to invest alongside of us, and I invest in each opportunity, and basically provide a passive investment on a vetted passive opportunity in a vast amount of asset classes, particularly recession-resistant asset classes, most notably self-storage and mobile home parks.

Joe Fairless: I see on your website you’ve got properties across the country, and I’m looking at Recently Closed, and one’s in Fayetteville, North Carolina – I was thinking Arkansas – and you’ve got things across the country… How do you qualify these deals in all these different markets across the country?

Hunter Thompson: That’s a good question… A couple different things. First of all, from a geographical location standpoint, a market identification standpoint, we’re consistently seeing opportunities in the South-East in self-storage, and the reason for this is the two driving factors of really what makes a good market – the economics and demographics.

The economics is such that in the South-East the cost of living is low enough to substantiate — if you’re making $50,000/year you have a relatively comfortable life and have the capacity to do the two things you need for self-storage, which is things to store and money to pay for the service. And you kind of compound that with the demographic shifts that are taking place, particularly in markets like Florida, where a lot of baby boomers are retiring and moving to that market. Baby boomers present an interesting data point with self-storage because social security checks are probably around the $1,300/month range, the average two-bedroom apartment is about $1,200/month, so a lot of these baby boomers that are retiring (10,000/day or so), they’re being forced to downsize. And when they’re downsizing, they’re very likely to keep their stuff. When you’re put in that position, you’re very much more likely to be a tenant of self-storage, so it presents an investment opportunity.

In terms of going and doing due diligence across the country, going on-site is probably the last stage of due diligence. We’re very heavily reliant on upfront due diligence in terms of not only markets and demographics and economic third-party verification in terms of verifying those data points, but when you go on-site you learn a lot… Not only in terms of the market – you can get a feel for things that can’t really come across on the spreadsheet, but also in terms of the previous property manager, which kind of paints the picture for where the value-add is gonna be in that particular opportunity.

Joe Fairless: Let’s dig in there. You said you do third-party verification prior to going on-site… What are those data points that you’re specifically looking for?

Hunter Thompson: I’d say with self-storage there’s a couple things you wanna look at. First of all, it’s really good to have 50,000 people within a five-mile radius; that is gonna provide you with a substantial economy, with a diverse employment group. Now, this is typically, right? Some things change, but that’s just a good data point to look at.

We wanna see 20-25 daily traveled vehicles per day, and something else to keep in mind is–

Joe Fairless: Wait, 20 to 25 thousand…?

Hunter Thompson: Thousand, yeah. That’s important. 20 is not gonna cut it. What’s equally as important as that extra times 1,000 there is that the vehicles have visibility to the facility. You can get caught up in that data point and inappropriately assess the value and the visibility by just looking at how many vehicles pass by.

In self-storage in particular, a lot of properties may be tucked away behind something like a Walmart, which makes it completely invisible. That needs to be taken into consideration. A medium household income is also very important, and that’s something you wanna look at in the three and five mile ranges. I like to see 50,000.

One of the things you hear a lot with self-storage is that the asset class is still relatively new, and it experienced a tremendous increase in its overall scale over the last 20 years or so. From about 1993 to about 2010 or so, the number of facilities more than doubled, from about 20,000 to 53,000. So right now there are more self-storage facilities in the U.S. than there are Subways, Starbucks and McDonald’s combined, which is just unbelievable.

Now, that paints an important data point in terms of the desirability of the asset class from an investor’s perspective, but more importantly, they’re easy to build. So you have to identify markets that are under-supplied, and one of the ways to do is to look at the national average, find the number of square foot per person in particular markets on a national basis, and find where that market sits in that space. So we underwrite deals typically to seven square foot per person, and multiply it by the population size and you get a good idea of the supply/demand equilibrium in that market.

Joe Fairless: Seven square feet of self-storage per person?

Hunter Thompson: Correct.

Joe Fairless: Okay. Because I’m slow, will you run that formula by us one more time?

Hunter Thompson: Basically, the number of people times seven in the market, and that will give you a good idea of the demand for square footage in the market. For example, when you create that calculation you will find a number of square feet, and if the number of square feet that’s already available in the market is above that number, the market is over-supplied. If it’s below that number, it’s under-supplied.

And just to add to that, one of the things you wanna look at is a typical self-storage facility is somewhere between 50,000 to 100,000 square feet. Those are the ones we look at, at least. So if you have a market that is 200,000 square feet under-supplied – which is possible – within a five-mile radius, that means that even if one was built next door to your facility that you’re considering buying, you’re still gonna be in an under-supplied situation. That’ll kind of give you an idea of some of the metrics that we look at.

Joe Fairless: And why seven?

Hunter Thompson: That’s just basically what the national average is. The national average is about 7.8, so to be conservative we use 7.

Joe Fairless: 7.8 square feet per person of storage facilities in that market?

Hunter Thompson: Exactly. So you wanna look at it on a radius-basis, and you can do this in particular markets, and it’s important to keep in mind that some markets, that supply/demand — that doesn’t paint the entire picture. So there are some markets – lakes, for example, where people are gonna be really likely to use self-storage because they’re using boats and jet skis and stuff like that, or they are more affluent markets etc. There may not be a lot of population, but there’s gonna be a lot of demand for self-storage.

So it’s something to keep in mind, but it’ll give you a good idea on initial due diligence in terms of that [unintelligible [00:12:48].01]

Joe Fairless: Is it possible to search publicly how many self-storage units there are within a five-mile radius?

Hunter Thompson: To get accurate data you have to use a paid program. It’s possible to estimate it based on looking on Google and estimating the square footage of each property, but to get accurate data you have to use something like Costar or something in that range, $2,500 or $5,000 a month.

Joe Fairless: Is that what you use?

Hunter Thompson: Yeah, and this is in conjunction with our sponsors, as well.

Joe Fairless: Okay. That’s how you identify the opportunity with self-storage. Now, you mentioned — the other thing I’d like to learn more about is you said “going on-site is the last part in the process.” You do a lot of preliminary upfront work… What are some of the things when you attend that walkthrough for the first time that you’re looking for?

Hunter Thompson: There’s a couple of things to take note of. First of all, the real opportunity — and this is just my opinion; people have different opinions about this, but in my opinion, the real opportunity in self-storage is in value-add. The way that value-add is created is two-fold. You have a very sticky tenant base. These facilities are usually highly occupied, but there can be a significant discrepancy between the physical occupancy and the economic occupancy. This is a term that is used in other asset classes, but I’ve never found an asset class where it’s more important in self-storage.

For example, you can have a property that’s 90% occupied, going along, cashflowing, that’s 67% physically occupied. The discrepancy there, the delta is due to things like low rents, mismanagement, or management being overpaid, concessions being too high, prepaid rental rates etc. And you can also look at things like U-Haul. U-Haul is a strategy that we implement in conjunction with our sponsors where we have a relationship with U-Haul, we allow U-Haul to park their trucks on the facility; they park 15-40 trucks, depending on the site of the facility. We rent those trucks out to the tenant base and get compensated from U-Haul for facilitating the transaction.

The reason this is key is that on a risk-adjusted basis this is really favorable because there’s no capital expenditure there. We’re not maintaining the trucks, we’re not buying the trucks; they’re just simply parking the trucks there, and I have personally invested in facilities where this one line item has gone from $0/month to $3,500/month, directly to the bottom line, just from those commissions. So if you’re looking at $3,500/month times 12 divided by 7-cap or so, you’re talking about $600,000 worth of equity, and on a risk-adjusted basis, again, very favorable.

There’s several other strategies similar to that, but that’s the one that’s very simply implemented, and very favorable.

Joe Fairless: What’s number two?

Hunter Thompson: In terms of those strategies?

Joe Fairless: Yeah.

Hunter Thompson: Mandatory tenant insurance is another good one. So you can advertise rates by saying “$120/month for climate-controlled units.” Then when the tenants get on the site, you say “By the way, we have to have mandatory tenant insurance for all of your items, so that in the event that something goes wrong, all of your items are insured, you get paid out.” Very similarly, you facilitate that transaction and get a commission for facilitating it, and this again can add something close to $1,500/month directly to the bottom line, which is $200,000 or $300,000 in equity.

I think the key there is you’re just really padding your equity position so that in the event of a capital market correction, or something like we saw in 2008, your equity position is better solidified and your loan-to-value is more stabilized and secure.

Joe Fairless: That’s the value-add component, and that can help some Best Ever listeners make a whole lot of money in self-storage. I appreciate you sharing that. I wanna go back to the question of what you look for when you’re on-site at the property… So what are some of the things you look for?

Hunter Thompson: First of all, we’re looking for the lack of the implementation of those strategies that I just mentioned. One of the things that we wanna find is signs that it’s run by a mom-and-pop operator. You can see little things — for example, we were on-site a few years ago and the manager was renting scissors. They had one pair of scissors that he was renting out, because people use boxes when they’re moving etc., so he was just renting out these scissors to the tenants, for free. Now, that isn’t really gonna affect the bottom line, right? We’re talking about $7 worth of margin, of maybe 50% or so – it’s not really gonna make a huge deal on the spreadsheet, but the key there is the mindset that this person was going about his business with. It’s thinking of it as a business, as opposed to just thinking of it as a way to make some cashflow, and that’s the key. The business operates much more like a fully-functioning business than a cash-flowing passive investment vehicle… Though it can be profitable both ways.

Joe Fairless: So when you arrive on-site, you’re looking for signs that it’s run by a mom-and-pop operator… But wouldn’t you already know that it is or isn’t run by a mom-and-pop operator, since you’ve done all this due diligence before you get there?

Hunter Thompson: Yeah, absolutely. That would be in late stages, but those things can paint a very good picture, but it’s hard to look [unintelligible [00:18:22].08] So the reason I’ve mentioned that is that when you’re looking on a spreadsheet, people may pass on opportunities that are absolute goldmines.

I mentioned earlier that a facility may be 90% occupied; most investors that are listening to this podcast for sure will probably say, “My money’s better spent in other places, where there can be significant value-add”, but because of that and the combination of the tenant base, which is very sticky – it’s definitely something I should touch on – because there are monthly lease renewals and the gross dollars is relatively low… So if you raise rents by, let’s say, 6%, that may be something like $6 or $9/month to the tenant base. So the question really becomes “Is this tenant gonna take the time off work, move down the street where they’re probably going to do the same thing, just for the $6/month or so?” Overwhelmingly, the answer is no. So those value-add strategies can be implemented very quickly because of the sticky tenant base and the monthly lease renewals and the low gross dollars amount.

Joe Fairless: Now taking a step back, looking at your business, when you put together a deal, how do you make money?

Hunter Thompson: We’re compensated based on performance above a pref. So our sponsors get compensated and we create an LLC, and our accredited investors invest into that LLC, and we get compensated based on the performance above a pref… A share in the proceeds above a preferred return.

Joe Fairless: Okay, and what are the typically fees that are charged?

Hunter Thompson: We kind of looked at a couple different structures out there, and I’m very much aligned with — incentive alignment is like a driving factor in my perspective on investing, as well as a business owner… So the 2 plus 20 is the typical private equity firm… They’re incentivized to raise money, and that’s how they make money; that 2% assets under management fee is gonna be paid regardless of performance. Now, the reason they do this is because it’s scalable and predictable etc., but we have foregone that and will continue to do so as long as possible.

So in replace of an 80/20 plus 2 or something like that, we usually implement something close to a 7% preferred return with a 70/30 split thereafter. This results in something that’s very competitive with the other platforms or private equity groups out there, but the key is that 90% to 100% of the compensation is based on performance. So when you compound that with the fact that I personally invest in each opportunity… We’re not doing a lot of deals; we’re doing deals that I’m personally confident will perform, for my own portfolio, and that’s really the way that I like to set everything up.

If something goes sideways and someone says “Hey, this is going sideways”, trust me, I know; I’m gonna be on top of it more than anyone else… And I like that. So that will give you a good idea of the fee structure there.

Joe Fairless: Okay, great. And do you also have an acquisition fee?

Hunter Thompson: To this day, we have not been paid cash for any acquisition fee. We can be compensated and typically are compensated in shares, again. So it’s performance above a preferred return. That’s something that can be deal-dependent, obviously, but I wanna have as much exposure to these opportunities as possible, so that’s the way that I prefer it.

Hunter Thompson: Exactly, and I think that’s important, and it’s a really important question to ask how is the compensation being presented, because earlier I mentioned there’s a co-invest. Well, if I said there was a $100,000 co-invest and I have a $200,000 acquisition fee, there is no co-invest, to say the least, and I’m incentivized to just do deals. So I don’t like that. I like being very picky, and I’d be happy to do four deals a year for the rest of my life. So that’s what I look for.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

Hunter Thompson: I’d say focus on education. Programs like yours – you’ve had hundreds of millions of dollars or billions of dollars of information from your guests come on your program and talk to your audience for free, and it’s crazy the amount of content which is available, that was not available when I was going to those networking events I mentioned is unbelievable.

When you build relationships with people that focus on education, they’re always in it for the long-term. That’s why they’re focusing on helping educate their clients, and that is totally the game in real estate. Building relationships for the long-term, building life-long relationships based on aligned incentives is really the key.

I offer a free podcast as well, I had some very sophisticated individuals… I very well could turn that podcast into a course and charge $1,000 for it, but I just like helping people, so that’s kind of been my motto.

Joe Fairless: How do you qualify deals across multiple asset classes? Because I see on your website that you’re in multifamily… We’ve spent most of our time or all of our time on self-storage, but I see also mobile home parks, performing real estate notes, office space etc.

Hunter Thompson: Yeah, sure, it’s a good question. I’d say that a lot of people that are successful in business say that you have to be laser-focused, and if you try to be too diversified in your focus, you’re not gonna accomplish anything; you certainly won’t be an expert in anything… And people may look at the portfolio, and look at my own personal investment portfolio and say “How do you have an edge?” Well, the reality is I’m hyper-focused in the passive syndication space, and my value-add is identifying asset classes and identifying sponsors that can be complete experts in their particular field.

My expertise is by really conducting a significant amount of due diligence on sponsors, and going through those underwriting assumptions on a line-by-line basis, trying to figure out who I’m dealing with, going on-site (like we mentioned earlier), and that’s really the value-add there.

When you’re able to leverage other people’s expertise, time, access to credit, liability etc., you can build a diverse portfolio without doing what a lot of people may do when they try to spread themselves too thin.

Hunter Thompson: You know, we mentioned it earlier… That Fayetteville, North Carolina deal is definitely up there. Bought for 6, it’s gonna be sold for 9,6 very soon.

Joe Fairless: Over what period of time and how much did you put into it?

Hunter Thompson: It’s been about three years… As I said that, another one came up – there was another mobile home park deal we bought for 9 and sold for 20, and I think it’s probably gonna outshine that one. That was taking place about four years.

Joe Fairless: On that one example, the Fayetteville one – bought at 6, selling at 9,6, right? Did I hear you correctly?

Hunter Thompson: Yeah, something very close to that.

Joe Fairless: Something close to that. Three years… How much did you all put into it?

Hunter Thompson: We put in a total of about 200k on that one. We obviously partnered with other capital partners to take down the entire equity stack.

Joe Fairless: You mean for improvements — not your equity into it, but in order to get it from six to nine I imagine there was some cap-ex money that was put into it. How much of that was put into it?

Hunter Thompson: About 800k.

Joe Fairless: Okay, so you’re all-in around seven, and you’re selling it at about 2.5 more than that… What would you attribute that to primarily?

Hunter Thompson: Well, it’s not exactly about the return there, it’s about the risk-adjusted basis. So all those strategies I was mentioning earlier – none of them were being implemented. So the way that that was able to happen was just implementing those strategies. Not building a new facility, not expanding units etc., but just implementing those strategies.

Joe Fairless: Cool. And you went through those value-add strategies earlier. I appreciate that. What’s a mistake you’ve made on a transaction?

Hunter Thompson: Well, I made a bet on an operator that didn’t have a lot of experience, in an asset class I don’t think is very scalable, which is single-family houses. Fortunately, the operator was me, so it didn’t cost me very much money, but I learned my lesson.

That was one of the first things I think a lot of people do – invest in houses that are $30,000 or $50,000, thinking that they’re gonna perform as they do on paper. I made that mistake early on in my career.

Joe Fairless: How much did you lose?

Hunter Thompson: About 30k.

Joe Fairless: What’s the best ever way you like to give back?

Hunter Thompson: I am very much a fan and a proponent of capitalism and free markets, so this is an important question, because it’s challenging to answer without tampering with markets… But I think that disaster relief is one of those instances where you can make a significant difference without tampering with the market. Team Rubicon is someone that specializes in those particular situations.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Hunter Thompson: Feel free to e-mail me at any time – HunterThompson@cashflowconnections.com. I also have the website, CashflowConnections.com, and we have a podcast — if your podcast listeners out there love to get your perspective on the show, it’s The Cashflow Connections Real Estate Podcast.

Joe Fairless: I think we have a lot of podcast listeners, and I am very grateful, Hunter, that you spent some time with us. You got very specific, which we always love to hear, about how to evaluate the demand for a self-storage facility, talking about the number of people times that by seven, and that gives you the demand, and it’s the number of people within a five-mile radius.

Obviously, there are variables in play, like with any generalization like that, but that is a good rule of thumb for us to get started, and how to evaluate demand. If it’s over that amount, then it might be over-saturated or over-supplied; if it’s under, then it might be under-supplied… That’s the seven mark.

Then also the way that your company makes money, as well as ways to add value for self-storage facilities, and you gave a couple tips there.

Thanks so much for being on the show, really grateful. I hope you have a best ever day, and we’ll talk to you soon.

Wow! Today we have a major commercial real estate investor dropping knowledge. Brian literally wrote the book(s) for commercial real estate investing. Not only will he give us actionable advice for commercial investing, but a lot of the advice applies to any form of real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. With us today, Brian Hennessey. How are you doing, Brian?

Brian Hennessey: Really good, thanks very much for having me, Joe.

Joe Fairless: My pleasure, nice to have you on the show. I read one of your two books – The Due Diligence Handbook For Commercial Real Estate, and I reached out to my team and I said “Let’s bring Brian on… This is some good stuff.”

A little bit about Brian – he is a senior VP of Avison Young Intelligent Real Estate Solutions… You need an acronym for that, that’s a mouthful. Prior to working there, he served as Senior Vice at Colliers International for five years. He’s been in commercial real estate for over 30, and he’s got a new book that is out – it’s How To Add Value For Commercial Real Estate. Based in Los Angeles – with that being said, Brian, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Brian Hennessey: Absolutely. I am an investment broker with Avison Young, based here in Los Angeles, but over my career I’ve done a number of positions in the commercial real estate industry, including being a syndicator and an acquisition person for an investor where I purchased properties all over the US, over nine million square feet, just with him. That’s where I really got to learn the due diligence into the business, when we were buying so much property so quickly that we really had to be on our A-game because we just had a small group that we worked with when we were purchasing these assets… So it really required me to be very scrutinizing.

Actually, let me tell you a brief story of how it happened. I ended up — the first couple transactions that I did, I made so many mistakes, and even though I had been in the business for 18 years, I thought “Oh, this is a natural slide.” Well, I had never been a buyer of large commercial properties before… And that’s when I decided I’d better start creating a reference manual for myself so I don’t have to reinvent the wheel every time, because there were so many things to remember.

So that’s how my reference manual came about, and then when I decided to get back into the brokerage end of the business again, I said, “Well, what am I gonna do to differentiate myself?” I decided to take my reference manual and create an investor handbook that I could use as a marketing piece. I actually put it up on Amazon, just never thinking it would ever sell one copy. I wouldn’t even spend $150 to format it, because I figured “Why do it if it’s never gonna sell?” and I ended up just handing it out to people as I spoke with them… Much to my surprise, the book started selling, so I decided to take it a little more seriously, create a professional design cover and format it and put it out there, and that’s when it took off, and I’m still shocked today that it’s been a number one bestseller on Amazon for real estate books.

This also tells me, as I’m going out speaking to people, that it’s a very critical component that people are missing when they’re investing in real estate. So I go out there and try to tell people “You really wanna have a proven system to do this, because there’s just way too many things to remember, and things would just slip through the cracks.” Having and adhering to a proven system allows you to conduct due diligence faster, easier, more efficiently, and you’re less likely to miss something.

Joe Fairless: Speaking of missing something, what are some due diligence items that tend to be overlooked if you don’t have a system?

Brian Hennessey: Well, in my talks I talk about the mistakes a lot of investors make, and we can talk about those if you like…

Joe Fairless: Yes, please.

Brian Hennessey: The first mistake I see a lot of investors make is really not valuing the property correctly. What I mean by that is they go out and they will negotiate a deal with a seller, and then find out later “Wow, I’m really over-paying”, or maybe they don’t find that out until they go to put a loan on it. I tell people, you really need to do your homework first. Make sure you’re checking all sale comps and other available properties on the market. We have checked a few things out and everything is working out okay, but that’s not always the case.

Segueing from that is not understanding your lender’s underwriting requirements. What happens is a lot of people will say “Okay, I’ve made this deal on this property”, whether it be some units or a commercial piece or whatever it is, and they’ll go in and the lender will say “Well, we can’t lend this kind of money that you’re looking to get…”

What I tell people is before you spend a lot of time, money and energy on conducting due diligence, you wanna have those preliminary discussions with some lenders about the amount of the loan you’re considering to put on there. Otherwise you could be spinning your wheels out there, which you don’t wanna do.

Joe Fairless: Great point.

Brian Hennessey: Another one I tell people to do is check to see if the property complies with all the current municipal building codes. That’s just a quick trip down to the city building department. But you don’t wanna get into the due diligence of it and overlook that part, because if you’re gonna be doing some work, it could trigger some compliance issues which could cost a lot of money. That’s where I see people getting tripped up, like “I didn’t know it was gonna cost me this much money if I was gonna do this…”, and it’s like “Well, if you would have made a trip down to the city, you might have found out.” So I tell people, just make that part of your routine when you’re conducting due diligence, because there may be some issues coming up where you need to comply in the future that could affect the property you’re looking at.

Joe Fairless: What specific department do you go to and then what questions do you specifically ask?

Brian Hennessey: Usually, the planning department will say “Let’s look up the property on the computer here and see what’s going on with it. Okay…” Sometimes they’ll say “Oh, there is an issue outstanding here that it’s not compliant with this code, so you need to make sure… They’ve been sent a notice”, and I say “Can I get a copy of that notice?”, which I will. Then I’ll say “Are there any future code compliance issues coming up that I need to be concerned about regarding this property?” “Oh, there might be a sprinkler retro-fit” or something of that nature… These are the things that I wanna find out.

Joe Fairless: Yes, that’s great. Great stuff.

Brian Hennessey: Another mistake I see is a lot of people assume there’s no issues with any of the tenants’ leases, and these are tripwires that can be avoided if you’re scrutinizing the leases carefully. What I mean by that specifically is if it’s a commercial building, you wanna look to see if there are any termination provisions, contraction provisions? Are there any caps on operating expenses? Do they have unlimited use of the HVAC (heating, ventilation and air conditioning) or electricity that the landlord is responsible for? Issues that are gonna affect the value of the property.

A perfect example of that might be maybe they have an option, but it’s at a fixed rent, and they get another 5-10 years that they can exercise that option. That’s gonna affect the value of the property.

So make sure you’re scrutinizing the leases carefully. Go through the tenant correspondence files if you’re going to a property management company, or if it’s the owner of the property, “Can I see your correspondence file with your tenants?” Why? Because it’s gonna have valuable information in there. If it’s a multi-tenant property, then you’re gonna see correspondence in there that’s gonna tell you a lot about what the issue have been. Hey, the windows are leaking; hey, the roof is leaking; hey, the air conditioning is not working properly… Or whatever the case may be. Hey, we had another break-in… These are all red flags that are popping up and you’re saying, “Well, I’d better find out more about this.”

Joe Fairless: Do you have a team that does it – a third-party team – usually, or… I know you’re not doing it right now in your role, but would you do it personally if you were in that situation?”

Brian Hennessey: Yes, I would, and you can hire outside third-parties to do it; very expensive. Personally, I like to do it, because I’m looking at it much more subjectively, because I’m the one that’s gonna inherit the problems when I own the property.

As a matter of fact, Joe, I do do it as a broker. I’ll ask my clients, and the ones that know me usually say “That’d be great. I’d love to have your help on this.” The ones that don’t – and for your broker listeners out there, that are in the brokerage end of the business, I’d shoot a quick e-mail off to your clients and say “Since we’re in escrow now, I’d love to help you with your due diligence. Please let me know and we can go through the list of things that we wanna accomplish” and if they turn you down, at least you have documentation that you’ve tried to help them.

That brings me to another point I would have your listeners pay special attention to, and that’s to communicate everything through e-mail. That doesn’t mean to say you can’t talk on the phone, but you have a written paper trail on an e-mail. If somebody say, “Oh, I’m gonna get you the backup information on that request you just made.” “Hey, can I get the paid invoices on that tenant improvement job that you did, or the paid leasing commissions?” and they’ll say “Yeah, I’m gonna get that to you. Let me dig that up and send it over.” Well, if they don’t get it over, now you’ve got a running list of the things you asked for.

What I’ve seen people do is they get involved in these transactions and they’re so busy and they’ve got so many things coming at them that they can’t possibly remember everything they asked. Do it in an e-mail, and you can go back and say “Oh yeah, last Tuesday I asked for this, and I never got it.” You can forward that on, “Hey, as per our conversation last Tuesday, you were supposed to get this to me”, and if they don’t, what’s happened to me before is I’ll get towards the end of my due diligence period, and say “Well, if I’m not gonna get it by tomorrow, then I’m gonna assume I’m gonna a credit for that amount at the close of escrow”, and all of a sudden…

Joe Fairless: [laughs] You start getting the stuff, huh?

Brian Hennessey: Right, you start getting that, and “Well, here’s what’s going on – we’ve got a dispute on this one”, and now all of a sudden you’ve uncovered the real problem. But what happens is if you’re not paying attention to it, guess what? It’s gonna slip through the cracks, and then once you’ve closed escrow, it’s much more difficult.

Joe Fairless: Oh, forget about it.

Brian Hennessey: Yeah, it’s much more difficult. So I tell people, just send off the e-mails; it’s easier to keep track of, and worst-case scenario is if you don’t get it and you forget it but you’ve asked for it, you’ve got something to bring to court, which I hope you don’t have to do, but… Sometimes you do.

Joe Fairless: Have you had to do that?

Brian Hennessey: Yes, as a matter of fact.

Joe Fairless: What happened?

Brian Hennessey: Essentially, we were told that a certain tenant was to have paid a [unintelligible [00:13:42].23] when in fact they didn’t, and we let it slip through the cracks, and then we went back… What happened was with one letter to our attorney and the backup e-mails and what have you, we were able to get a settlement from him. But you try to avoid that as much as possible.

Joe Fairless: Absolutely. Everyone loses.

Brian Hennessey: Yeah, exactly. It’s just more brain damage than it’s worth. So if you do your due diligence properly upfront, you’re gonna minimize this. Warren Buffet said “Risk comes from not knowing what you’re doing.” When you have done proper due diligence, what happens is you’re minimizing that risk and you’re able to make those decisions, whether to move forward on an investment or not, based on your investigation.

Joe Fairless: One item that resonated with me because it recently happened to me is number two, not understanding your lender’s underwriting requirements. Well, we understood the underwriting requirements… Let’s see, this was about three days ago – we got our appraisal back and all of the third-party reports for an apartment community we’re buying, and we’re getting a loan with Fannie Mae, and they have a shorter effective useful life on certain cap-ex items, meaning that those items have to be replaced more frequently over the term of the loan, which increased the replacement reserves from $246/unit to $263/unit. We pushed back as much as we could, but that’s the lowest that they would do the reserves…